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Principal Financial Group Inc
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Good morning, and welcome to the Principal Financial Group Second 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 call over to John Egan, Vice President of Investor Relations.
Thank you, and good morning. Welcome to Principal Financial Group's second quarter 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 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?
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. Deanna will follow with details on our financial results and capital deployment. In the second quarter, we delivered $427 million of non-GAAP operating earnings, an increase of 9% compared to a year ago quarter. This brings non-GAAP operating earnings to $827 million through six months. As I reflect on the first half of the year, we continue to demonstrate strong business fundamentals, balance investments in our businesses with expense discipline, and be good stewards of shareholder capital.
Importantly, we continue to execute our customer-focused solutions oriented strategy as we expanded our global distribution network an array of retirement, investment, and protection solutions. And advance our digital business strategies creating a better customer experience, while gaining operational efficiencies. Compared to a year ago, total company reported assets under management or AUM, increased $30 billion or 4% to a record $696 billion. As a reminder, China isn't included in our reported AUM. Excluding the impact of foreign currency exchange, AUM in our China joint venture is up 2% compared to a year ago with $147 billion at midyear.
This increase is despite $7 billion of negative net cash flow in the current quarter, as investor demand has shifted towards equities. As previously discussed, the vast majority of our AUM in China is in the money market funds. Under our total company basis, we had $2 billion of negative net cash flow in the second quarter as positive net cash flow for the Retirement and Income Solutions in Principal International was more than offset by withdrawals from Principal Global Investors.
Excluding the large withdrawal in PGI previously communicated, total company net cash flow would have been positive. RIS delivered $2 billion of net cash flow, its sixth consecutive positive quarter. This was driven by continued strong sales, retention, and reoccurring deposit growth in our ISP. And record second quarter pension risk transfer sales in RIS spread.
Over the trailing 12 months RIS has delivered over $9 billion of positive net cash flow, an increase of more than 250% compared to the same period a year ago. Principal International generated $600 million of net cash flow. Its 43rd consecutive positive quarter. Primarily driven by improving flows in Brazil. Net cash flow is being pressured in most of the countries in which we operate. But we remain confident in our opportunities for growth, with our involvement in the private pension reform discussions around the world, we see increasing recognition by governments of the importance of voluntary savings, and the benefit of using asset managers to improve long-term returns.
Moving to PGI, source net cash flow was negative $4.3 billion. As discussed last quarter, we had a single international client withdrawal $3.2 billion during the second quarter. The client has continued to award and fund additional mandates with us reflecting the ongoing strength of this relationship.
Slide 5 highlights the continued recent improvement in our investment performance. At the end of the second quarter for our Morningstar rated funds 88% of the fund level AUM had a four or five star rating. And 83% of our Principal actively managed mutual funds, ETFs, separate accounts and collective investment trusts, were above median for the five year performance.
While the asset management industry and PGI continues to experience pressure, we're pleased with our headway on multiple fronts to drive sales growth and improved retention, particularly in the areas of distribution and new product development. We continue to add key distribution resources and we're building out our business intelligence to help inform our sales process, positioning us for increasing success in key institutional, and retail markets.
Other progress in the second quarter included the launch of more than a dozen new investment strategies across our U.S and international platforms. Of particular note, Principal Global Investors continue to expand its leading suite of income oriented investments. We launched our first interval fund, the Principal diversified select real asset Fund, which primarily invest in private real estate, infrastructure, and natural resources. The launch reflects principles commitment to addressing growing client demand for access to private assets, the line with longer-term investment goals, as well as offers potential for enhanced risk-adjusted returns and Income through various market cycles.
Additionally, during the quarter, the Education Trust Board of New Mexico, selected Principal Global Investors to provide investment management services for its scholars Edge 529 plan. This demonstrates our ability to leverage our retirement and investment expertise to help participants achieve their educational savings goals. Funding is expected to occur in the fourth quarter 2019, and we will manage the majority of the assets in the plan.
This along with a strong pipeline, gives us confidence in delivering strong net cash flow in PGI in the second half of the year. Through mid-year we've earned more than 50 total placements, with more than 30 different offerings on more than 20 different platforms. This reflects continued strong interest in our specially, solution-oriented and alternative capabilities, and our continued success in getting these investment options added to third party distribution platforms recommended list, and model portfolios. I'll now share some additional execution highlights. Starting with our acquisition of Wells Fargo Institutional Retirement & Trust businesses or IRT, which closed on July 1.
As a reminder, as of the end of 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, trust in custody, and institutional asset advisory. The acquisition again 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, it doubles the size of our U.S retirement businesses. But more importantly, it improves our ability to serve customers, reinforces our commitment to the retirement industry, and enables us to create new value in the marketplace by combining the strengths of both business models, technology platforms, and teams clearly will benefit from adding scale, and from new complementary capabilities such as non-retirement trust in custody. We'll also benefit from accessing the highly talented Wells Fargo IRT team, and their strong relationships with intermediaries. As announced in June, we've established a unified leadership team to drive the business forward.
We've also established a transition services agreement designed to help us drive strong retention by minimizing disruption to clients by keeping all services the same on day one, thoughtfully and collaboratively, identifying the best products, services and platforms within both business models, as well as providing ample notice to customers of planned enhancements over time. The acquisition has been received positively by the Wells Fargo IRT employees and clients as well as by the consultant and adviser communities. We welcome and look forward to serving our new customers, and working with our new employees, advisors, and consultants.
We'll continue to provide progress updates throughout this multi-year integration. As additional highlights in our U.S Retirement business, we launched impact 401k during the quarter to deliver best in class resources at a competitive price, and drive positive retirement outcomes for small and medium-sized businesses and their employees. We also launched enrolling educate, our first of its kind self service educational model co-designed in partnership with our clients.
And we launched health savings account integration with Healthy Equity and Optum bank to give customers a more holistic picture of their retirement outlook, and make it easier for participants to manage their financial goals. In our protection businesses while we've had strong performance, we've continued to invest in our initiatives that make us easier to do business with.
During the quarter, we announced a digital collaboration with Limelight Health to streamline the quoting, rating, and renewal processes for group employee benefits. This technology will help us better serve brokers, and employers, and reach more employers and employees, in the small to medium-sized business market. Lastly, I'll share some key developments outside the U.S that demonstrates our focus on providing a better customer experience.
In Mexico, we launched a digital on boarding solution for mutual fund customers to simplify the process, and enabled us to deliver a personalized Retirement recommendation. In Chile, we launched a new app and a website for our customers, providing a more consistent experience, gold-based functionality, and access to a broader set of products. The Cuprum App reached 80,000 downloads in just 60 days, and is highly rated in the AFP marketplace. In India, we now have a fully digital end-to-end experience enabling customers to make smaller, but more frequent mutual fund investments. This aligns with our direct to consumer strategy in India, and reflects our commitment to make saving for retirement easier.
During the second quarter as part of our growing commitment to Southeast Asia, we rebranded our joint venture asset management operations in Malaysia, Thailand, Indonesia, and Singapore. We're proud of our long-term alliance with CIMB, and excited to help even more people in the region, and around the world achieved financial security and success.
Deanna will cover in a more detail, but I want to again emphasize our balanced approach to capital deployment. In addition to ongoing investment in organic growth, through mid-year, we've deployed more than $1.6 billion of capital in total. We've committed $1.2 billion to the Wells Fargo IRT acquisition, and we returned $430 million to investors through common stock dividends and share buybacks. I also share some noteworthy third party recognition for the quarter.
In our global asset management franchise, Principal Hong Kong was recognized by Lipper, with the best Hong Kong MPF over three-year award for the Principal China equity fund. In Chile, we were recognized by Morningstar as the best Equity Fund Manager 2018, and the best Latin American Equity Fund 2018.
Additionally, Forbes named Principal, one of America's best large employers, Forbes also ranked Principal number five overall in their list of Best Employers for women, and number one within the banking and financial services category, along with the first quarter recognition for our commitment to diversity, inclusion, and ethical behavior, this speaks volumes about our culture. A quick thank you to our customers as we celebrate our 140th anniversary this month, and to our employees, and retirees for living the core values that remains foundational to our success.
In closing, second quarter was a period of continued progress, helping customers and clients achieve financial security and success. I look for us to continue to build momentum in the second half of 2019, and for that momentum to translate into long-term value for our shareholders and stakeholders. Deanna?
Thanks, Dan. Good morning and thank you for participating on our call. Today, I'll discuss key contributors to our second quarter financial results, and provide an update on capital deployment. Net income attributable to Principal was $386 million for the second quarter including credit impairments of $13 million. Net income is $70 million lower than the prior year quarter, which benefited $100 million from the sale of an equity method investment. Reported non-GAAP operating earnings were $427 million, or $1.52 per diluted share, an increase of 13% from second quarter 2018.
Our non-GAAP operating earnings effective tax rate was 17% for the second quarter within our 2019 guided range of 16% to 20%. We continue to expect to be within the guided range for the full year. ROE excluding AOCI, other than foreign currency translation adjustment, was 13.6% on a reported basis. Second quarter non-GAAP pretax operating earnings included four significant variances resulting in a net benefit of $27 million. This includes $25 million of higher than expected variable investment income.
Higher prepayment fees and real estate returns were partially offset by lower returns from alternative. Impacts by business unit include $15 million in RIS-Spread, $5 million in specialty benefits, $3 million in individual life, and $2 million in RIS-Fee. A $7 million net benefit in Principal International with $10 million of higher than expected [indiscernible] performance, partially offset by $3 million of lower than expected inflation both in Latin America.
A $6 million benefit in RIS-Fee, from lower DAC amortization from favorable point-to-point equity market performance. And $11 million of elevated compensation and other expenses, including $9 million in corporate, primarily Wells Fargo IRT transaction costs and $2 million of integration costs in RIS-Fee. Looking at macroeconomic factors, the positive momentum we saw in the equity markets during the first quarter continued in the second quarter.
The S&P 500 index increased nearly 4% during the quarter, and the daily average increased 6% compared to both first quarter 2019, and the prior year quarter. Foreign currency exchange rates were a headwind for Principal International, with a negative $7 million impact to pre-tax operating earnings versus the prior year quarter, and a negative $2 million impact compared to first quarter 2019.
Mortality experience in RIS-Spread and individual life, was in line with our expectations in the second quarter. Specialty benefits pre-tax operating earnings benefited by approximately $9 million due to a very favorable claims experience in group life. On a trailing 12-month basis, excluding the impacts of the annual assumption review and foreign currency exchange, our revenue growth measures for RIS-Spread, Principal International, specialty benefits, and individual life, are within or above our 2019 guided ranges. Excluding the impact of the annual assumption review and the large PGI performance fee in the third quarter 2018, the trailing 12-month revenue growth measures in RIS-Fee and PGI are slightly below our 2019 guided ranges.
At the time 2019 guidance we set, we did not anticipate the significant decline in the equity market in December 2018. These metrics have been trending higher in the first half of the year as the equity market has rebounded. As anticipated in our 2019 guidance, RIS-Fee is experiencing a 1% to 2% drag on net revenue growth as planned sponsors move from commissions to fee arrangements. This shift results in both lower revenue, and lower commission expense with no impact on pretax operating earnings.
On a trailing 12 month basis excluding the annual assumption review, pre-tax margins for all business units were within or above the 2019 guided ranges. These strong margins reflect the balance of disciplined expense management and continued investments in our businesses. As expected some benefits of our accelerated digital investments are starting to emerge.
The following comments on business unit results exclude significant variances from both periods. Pretax operating earnings for all businesses with the exception of corporate were in line with or better than our expectations for the quarter. At $90 million corporate pre-tax operating losses were higher than expected. This was driven by higher security benefit expenses, as well as increased interest expense from the $500 million of debt we issued in early May to finance a portion of the Wells Fargo IRT acquisition.
We continue to expect corporate losses to be above the high end of our 2019 guided range of $300 million to $320 million for the full year. RIS-fee's underlying business fundamentals continue to be strong. Sales were $4.1 billion in the second quarter, bringing the first half of the year to nearly $9.5 billion, an increase of 32% from the first half of 2018.
Second quarter net cash flow of $1.4 billion was driven by strong sales, growth in recurring deposits, and low contract lapses. We continue to expect full year net cash flow to be within 1% to 3% of beginning of year account values, and defined contribution plan count increased 3% or nearly 1100 plans over the prior year quarter. During the quarter RIS-Spread had $2 billion of sales, driven by nearly $900 million of pension risk transfer sales a record for second quarter.
That said, we've seen a slowdown in fixed annuity sales as interest rates have declined. Despite this, third quarter pension risk transfer sales are off to a good start and the pipeline remained strong. At $160 million PGI's pre-tax operating earnings declined 11% from the prior-year period, driven by investments in the business, lower performance fees, and mix of business. With the second straight quarter of strong asset appreciation, PGI's pre-tax operating earnings improved 15% on a sequential basis.
While specialty benefits first quarter earnings were at the low end of expectations, favorable claims benefited second quarter earnings, and strengthened results through the first half of the year. That said, we expect pre-tax operating earnings for the first half of the year to be slightly more than the typical 45% of full year earnings.
As shown on Slide 12, we committed and deployed $1.4 billion of capital during the quarter, including $1.2 billion committed to the acquisition of the Wells Fargo IRT business and $150 million deployed for common stock dividends. As discussed first quarter, we have suspended share repurchases and expect to resume them no later than first quarter of 2020. With capital deployment of $1.6 billion in the first half of 2019, we've already exceeded our $1 billion to $1.4 billion guided range for 2019.
Last night, we announced a $0.01 increase in our common stock dividend payable in the third quarter to $0.55, a 4% increase from a year ago. Our dividend yield is approximately 4% and on a trailing 12-month basis, we're at our targeted 40% net income payout ratio. With the recent interest rate headlines, I wanted to address some potential impacts to Principal. During the second quarter at 3.9%, our new money yield was nearly the same as the overall portfolio yield excluding variable investment income.
While low rates are ideal for some of our businesses, the level of spread compression won't be as pronounced as in previous periods when the portfolio yield was much higher than the new money yield. While declining interest rates negatively impact general account returns and insurance related revenue that impact is partially offset by higher fixed income AUM, and revenue in PGI.
As a reminder, a majority of our operating earnings are generated by fee-based businesses, making us less sensitive to interest rate movements than many of our peers. An immediate 100 basis point decrease in interest rates, is estimated to reduce total company pre-tax operating earnings by less than 1% on an annual basis, excluding the impact of any potential unlocking of our DAC asset and other actuarial balances. In addition, we've always taken a disciplined approach to managing our liabilities by limiting or not offering certain products, and managing risk through pricing, distribution, and product design.
We'll complete our annual assumption review in the 3rd quarter, as we have in prior years. We'll update the starting point for interest rates to reflect the actual movements in rates over the past year. Additionally, we will review our models experience and macroeconomic assumptions, including among many other items long-term interest rates.
Finally, as mentioned earlier, we closed on the Wells Fargo IRT acquisition, and the economics of the business transferred to Principal on July 1st. Keep in mind that it's going to take some time to transfer the business, employees, and relationships to Principal. The earnings from this business will be reported in RIS-Fee starting in the third quarter. However, we continue to evaluate options for the best financial reporting structure over the long term.
Excluding transaction and integration costs, the acquisition is still anticipated to have an immaterial impact to 2019 non-GAAP operating earnings per diluted share, and is expected to be slightly accretive in 2020. The integration is off to a great start and as Dan said, the acquisition is being received positively by the Wells Fargo IRT employees, and clients, as well as by the consultant and adviser communities.
This concludes our prepared remarks. Operator, please open the call for questions.
[Operator Instruction] And the first question will come from Ryan Krueger with KBW. Please go ahead.
Hi, thanks. Good morning. I had a couple of questions on the Wells deal. I guess one in terms of the comment on slightly accretive in 2020. Was that including or excluding the transaction cost?
Yeah. Good question, Ryan appreciate it, and good morning. With that, I'll just have Deanna help out on some of the accounting questions here.
Yeah. So when we say neutral in the second half of '19, and slightly positive in 2020 that does exclude one-time transaction costs and integration costs. But it does include the earnings impact from any amortization of intangibles, as well as the additional debt expense that will reside in corporate.
Got it, thanks. And then can you I guess give any color on what you're seeing so far in terms of shock lapses, I know it's early, and maybe how it's comparing to what you had assumed?
It's not only early, it's way early. But I will tell you this, and I'm going to flip it to Renee and have her maybe expand on your question a little bit Ryan. But frankly from our perspective, the conversations with Wells Fargo clients, their consultants, the advisors, the employees have gone exceedingly well. They understand the rationale behind the transaction.
I think we've been able to get employees comfortable with the idea that these locations are going to remain open, and those jobs remain there and the other thing we find out is that you're going find out so much during due diligence, but we've been in front of a lot of clients now, and there is a very strong relationship between the relationship manager in the home office counterparts with these large clients. And so we feel very good about where we're at. But I would like to have Renee maybe expand a little bit on that. You've been out talking to so many of these clients Renee, you and Jerry Anderson.
Absolutely, Ryan. Thank you for your call, and your question. When we take a look at where we're at with this integration as Dan mentioned, we are really pleased with the progress that we've made so far and the warm reception that we've received from Wells Fargo IRT employees, the clients, advisors and consultants. And I think it really starts with the strong collaboration that we have between the Wells Fargo IRT team, and the Principal team.
Joe Ready, representing the Wells Fargo IRT team and Jerry Patterson, leading the charge on the Principal team have really created a tone of teamwork and collaboration right off at the start. And what that allows us to do is to come out to the marketplace in a very cohesive fashion. And one of the things that really helps us with this transition is the fact that we have a relatively long transition period baked into this deal.
So we anticipate being able to transition clients, and employees in a very thoughtful, and planned way over the course of the next 18 months. And as we consider this integration, were really looking towards four guiding principles. First is to make sure that we provide seamless customer service, and minimize any disruption to clients. And in order to do that, of course, as Dan mentioned, it's critical that we take care of the talent, and welcoming the Wells Fargo IRT employees to our team is central to that.
As Dan mentioned, we have committed to key locations that Wells Fargo IRT employees are currently working from and we've also integrated the leadership team. So now we have a very good representation of Wells Fargo IRT, and Principal both leading the charge . What that allows us to do then is to identify what are the best features of both their business models and to integrate those thoughtfully so that when we come to the marketplace we have capabilities that surpass either organization prior to this acquisition. So we're very optimistic, we're very confident in our ability to integrate this well, and we look forward to strengthening our growth and meeting customer needs in the future.
Ryan. Thanks for those questions.
The next question will come from Andrew Kligerman with Credit Suisse. Please go ahead.
Hey, good morning. Question: In the press release, in this section on RSV, you mentioned as there has been pressure on net revenues. You said there were competitive pressures. Could you elaborate on that a bit?
Yeah, I'll make a couple of quick comments. I think those pressures Andrew are probably not that different than what we've had for years. And as you can also see from the expense line, we're doing a good job managing our expenses, while at the same time creating new capabilities. Renee will get into some of the accounting, but the contra-revenue issues is part of the explanation.
The other part of it of course is a change in investment line up. Some of the lineups generate less revenue. And then lastly, it's so that nagging issue there is a lot of capacity today in this record keeping business, and of course one of the reasons, and the rationale behind the acquisition of Wells Fargo IRT business was to help with issues around scaling. But Renee, can you help with this one?
Yeah, absolutely. So, Andrew if you look at current quarter over prior year quarter, and you look at the net revenue line, and you make all the adjustments for the significant variances that we've called out, you will see that fees are generally down about $4 million and that creates a -- if you compare the net revenue growth to about the 8% average account value growth, you do see a gap there. And that gap is running between 8% to 9% depending on the period that you're looking at. That's a fairly typical gap that we see.
About 1% to 2% is going to be as a result of commissions going to fee based agreements. And in fact if you look on a quarter over prior year quarter basis, that pressure is about 1.5% the remainder of the gap then is exactly what Dan identified and it's not a typical from what we've seen in previous quarters. It represents fee pressures coming from a very competitive environment, coming from open architecture, passive investments, and sheer mix of business that we have. And so there is nothing that surprising there and concerning. And as Dan mentioned, we've done a very thoughtful and careful job of managing expenses as a result. So nothing that's surprising there, and we feel good about this quarter.
I see. So that makes a lot of sense. So maybe just drilling that into more of the numbers. So as I measure fees as a percent of that average assets, they were in 2017 about 66 basis points, in 2018, 63, and then in the first two quarters they were 58 basis points and 57 basis points. Could you give any sense of what we could expect on those ratios maybe looking out a year or two? And how will Wells Fargo affect that?
Yeah. So if you look at -- you're absolutely right. If you look at what has been happening on the fees as a percentage, or as a basis point -- expressed as a basis points, you do see about a one basis point drop per quarter. And again that's very consistent with the conversations in the past. We do believe that the trends that we see in the marketplace will continue for the foreseeable future.
What will happen though is adding the Wells Fargo IRT business to the next helps us with scale. And it not only helps us with scale, and gives us the ability to reinvest in our business, to make us more competitive, and to do even a better job of meeting, plan, sponsor and participant needs. But it also rounds out our capabilities, particularly in the non-retirement trust and custody lines, and again, giving us access to a really, really talented group of staff. So I think we -- we're confident about our future, but the industry pressure is there, certainly, but the acquisition helps on a great deal to position us for growth and profitability in the future.
Andrew, hopefully that helps.
Absolutely. Thank you.
Thank you.
The next question will come from Humphrey Lee with Dowling & Partners. Please go ahead.
Good morning, and thank you for taking my questions. Just to follow up on IRS fees, I think in Dan's remark and also Deana kind of mentioned that some of the accelerated digital investments starting to yield results. Should we think about kind of the ongoing investments by now is largely offset by the benefits coming through as well as the expense management? How should we think about the overall expenses running through the segments in near-term?
Yeah, yeah. I love your optimism but you're probably a couple of quarters ahead of us in your analysis. But Deanna do want help frame that?
Yeah, I'll take you back to what we talked about at both the Investor Day and outlook call at the end of last year. If you remember when we announced the digital investment, we said from '17 to '18 we would have about a 2% drag on our earnings growth. What we said as we came into 2019, was the net impact to earnings would be very similar in '18 versus '19.
Our investment actually goes up, but that increase in investment is actually offset by the beginning of the benefits. So benefit some of them do run through the expense line. But some of them run through the revenue line. And so again on the dollar amount of earnings, the impact in '18 and '19, are very similar, how they -- how it comprises by segment may be a little bit different, but from a percentage growth perspective pretty neutral between '18 and '19.
Equally as important to the financials, I would also tell you Humphrey, that we are very much on track with where we thought these initiatives would be in terms of their development in particular around improving the customer experience, tools related to helping the equity managers analyze stock opportunities better, and that's being tested with very favorable results. Tim could be happy to get into that if you'd like. And then lastly, the ability to better data -- manage our data and put it into the proper perspective to help us better serve the customer. So it is an investment worth making and equally as important. We're on track with where we thought we would be.
Got it. And then shifting gears to PGI I feel, based on your prepared remarks, it sounds like there is a lot of kind of positive momentum coming through in the second half. Maybe a question for Tim or Pat, are they still confident that PGI net flows would be positive in the second half of the year? And if so, how should we think about the trend, is it more like breakeven in Q3 and then may be ramping up in Q4? Like, any color would be helpful.
Thanks Humphrey, and I'll throw that over to Tim. I would tell you that, and he will get into the numbers, but we've really Tim and Pat Halter just done a terrific job getting the right people in the right roles including sales and distribution. Performance has started to turn around and the level of optimism we have is quite good. But Tim, you want to go ahead and provide some details?
Sure, thanks Humphrey for the question. And I think there are a number of reasons why we're optimistic about the second half of the year. And as Dan said it does really start with producing the right investment performance, and providing the right solutions to our clients. I think we talked quite a lot about really trying to change our approach and develop a strong relationship, make sure that we have solutions for the client in our macro environment.
I think that's really starting to take hold. I'd say as well we talked about some of the changes we've made to the distribution structure. So new leadership, really trying to align incentives when our customers win and when we win, making sure that we have the right talent. And so we've actually brought in a fair amount of talent from the outside.
And what we're starting to see us some really positive results of that. And what that's meant is that it's really starting to build in terms of our pipeline. So if we look at our mandates one, but not yet funding that pipeline is really strong. If we look at placements of our products on platforms, that pipeline is really strong. And then just behind that, we're seeing really a lot of interest across a large number of our strategies. So we're feeling really good about that. Now I'd tell you that it's difficult to call exactly how mandates come in, and how they fund. The 529 plan Dan mentioned will come in the fourth quarter. But we do believe that through the end of the year we will be positive in net cash flow.
Work -- more work to do, we have a lot of initiatives related to retention, and we're going to continue to focus on that as well. But again, pretty optimistic about second half of the year.
Humphrey, I appreciate you being on the call and your question.
The next question is from Jimmy Bhullar with JPMorgan. Please go ahead.
Hi, good morning. I had a couple of questions, first on the asset management business and just your optimism on flows in the second half. To what extent -- the New Mexico 529 mandate, because I think that will bring in maybe close to $2 billion potentially, do you think your flows will be positive, excluding that as well or is that a big part of your assumption about positive flows?
Yeah, I can assure you, Jimmy, our enthusiasm for the second half of the year's isn't just relying on one particular plan as Tim was framing. The pipeline is good of commitments, and again remember PGI gets fed by a lot of the other businesses here within the organization. So again, our optimism is coming from more than just -- more than just the New Mexico plan. As for trying to speculate exactly what that number would be that probably wouldn't be the wisest thing for me to do on this call.
Yeah. And then on the -- just if you could talk about the competitive environment in the Latin pension market and specifically Brazil there has been a lot of talk about pension reform. How do you see that working out, whether it's a plus or a negative for you? And then your flows in Chile were pretty weak this quarter, what's driving that? And any comments on how you see that market unfolding over the next year or so?
Yeah, I'm really glad you asked that question, Jimmy, because that's top of mind for us to. And before I throw it over to Luis, I would just say this, we've got a very diverse set of businesses between fee spread, and risk, and certainly geographic diversity as well. On any given time, some of these markets will outperform or underperform, and there certainly some political pressures, and economic pressures, that are impacting the Latin American businesses. But no better person to handle the question and dive into the details than Luis Valdes. Luis?
Okay, thanks. Hi, Jimmy. Let me start to put in some comments about Brazil and their pension reform. They're making progress. First time ever, there were making insurance program. The Congress, they do have a pension deal under discussion for approval at the Congress level. That pension bill has been approved by some of the most important committees at the lower chamber, so they -- they are making important improvements in that sense.
Most of that pension bill is related in order to reshape their pillar or one, their social security system, very compulsory of their story. If the pension bill is going to be approved as it is, I would say that the immediate impact is that is going to reinforce and to accelerate the growth of the voluntary pension business, second pillar, and third pillar in Brazil. So I wouldn't say that even though that pension bill is not addressing any particular issue for the voluntary market, that it's going to reinforce the idea that Brazilians, they have to save more, because essentially the benefits out of the Pillar one are going to be lower going forward.
So the good news for Brazil, good news for the pension industry. In general terms, that is about Brazil. And let me comment, our net customer cash growth in general terms about Chile. If you let me start saying that picture with conventional continue having the formidable and well-diversified portfolio. And as you have heard we have just reported 43 consecutive quarter of positive net customer cash flows. And the total of those AUMs is $76 billion in all those years. Among these countries Chile and particularly Cuprum, has effectively reported negative net customer cash flows, and the reasons are essentially three.
So the number one is that we are facing some short-term lower investment performance relative to some of our peers. And that is affecting our commercial activities and is putting some pressure on our ability to retain some assets and clients. This is a very competitive environment, Jimmy, and it is very important to keep in mind that -- to clarify also that we're not an outlier in Europe net investment performance, and with most of our funds, the difference in terms of performance between us, and the top performers is no more than 50 up to 60 basis points out of -- and the average investor return up to more than 7% as of today.
So we're working on that. The problem is fixable and judging with Team Dapper and Pigam we're putting a lot of effort and resources to work on that. The second thing those affecting the competitive environment there, is that we have more fits on the streets. As long as the industry has increased the number of salespeople in 14% relative to a year ago.
Our sales force remained constant and we're working on that in order to refine, you know the size of our sales force today. the third each of that we are implementing some changes in our sales and commercial areas. But in the short term for a good reason sometimes is affecting our Cuprum sales productivity in some areas of -- in Chile. In all of those are the three areas, we are working and panel innovation 52:50 in order to move Cuprum and it positive terrain. if you allow me, it's important to say something about Chile.
Chile is in this particular quarter, in local currency, reporting, the highest total AUMs that we have had historically in Chile for Cuprum and for our voluntary business. So from historical stand point of view, we are today managing more assets for our clients than at any given point of our history. That fact in particular is keeping us very optimistic about the gross from prospect for Chile.
Thanks for that question, Jimmy. The other thing I would just want to say, in addition to Luis's comments is that asset is still performing well within our guidelines of the acquisition, which is now coming in on six years Luis?
Yes, since 2012, '13. Yeah.
Yeah. So again it's hitting our financial expectations. So thank you for the question.
The next question is from Erik Bass with Autonomous Research. Please go ahead.
Hi, thank you. I also had a question on international, I mean just looking over the past 12 months. Net revenues are flat on a reported basis and the adjusted earnings declined this quarter and certainly FX has been a headwind. But I was hoping you could talk about some of the other drivers holding back growth given the growth in AUM in the positive cash flows that you've seen?
Yeah, thank you for the question. And certainly currency plays a role at that. But Luis, you want to go and take that?
Yeah, thanks for your question Eric. And if you're looking now, we are trailing 12 month basis. What we have reported, it looks like a minus 1%, the greatest was zero, if you're adding some FX. But if you are just adding the actual assumption changes and FX, immediately you're going in a positive to bring a 7% growth in our TTM basis for our net combined net revenues, which is pretty much more in line about our guidance.
Got it. Thank you. So, that number was an adjusting for the actuarial review?
Neither for FX. I mean, FX is the most important part of, you know, there is a kind of a comparison in the reported basis. In the FX in place $65 million negative in the trailing 12 months for PI.
We had a good 10-year run where FX was a just a great tailwind to these businesses. And obviously in the last six, seven, eight years, it's been just the opposite, It has been quite a headwind. The good news is the fundamentals, the underlying growth, in participants and what we're building is still quite good. But certainly currency can be vaccine to demonstrating a good solid financial results from these markets. Did you have a follow-up, Eric?
I did. Actually if I could just switch gears to pension risk transfer, where your sales have been quite strong year-to-date. And I was just curious if you think this is a pull forward of activity just to being early and -- earlier in the year than normal or does the pipeline remain robust for the second half of the year.
And yeah, so I'll have Renee pile on. But I would just say that of the $900 million in sales for the quarter, t isn't any one large plan and the pipeline still looks good. And it's -- although it's a competitive market, we still like the returns we're getting on the business. Few comments on PRT?
Absolutely. So if you look at the -- If you look at 2018 and you look at the number of opportunities or the size of the opportunities as they came to the market. It was about $27 billion market, our industry-wide. We think we're actually seeing that there is a possibility we may be on pace for that, or maybe slightly more as an industry, or as a total market in 2019. And we're fully prepared to take advantage of the opportunities. We'll remain very selective.
You'll see us be very disciplined on the risk that we take, and the way that we approach these opportunities. But the pipeline is strong, our position is good and we remain focused in the $5 million to $1 billion range of opportunities. And as Dan mentioned, our success to date is not heavy weighted towards any one transaction. It's a very nice basket of sales that are right in our niche, right in our target market. So we're very pleased with the results.
The next question is from Suneet Kamat with Citi. Please go ahead.
Thanks, good morning. I just wanted to go back to investment performance, noting the quarter-over-quarter modest improvement you're still down quite a bit year-over-year in terms of the one-year numbers. Just want to get some thoughts there. And at what point do you think that might impact the assets that you manage perhaps for the RIT business?
Yeah, clearly the outlier for that that one year number was the fourth quarter of this past year, and obviously it hunts enhance that one year performance. The good news is most all of the decision-making as I look at the tools that are being used to assess whether not to direct investment options to Principal, for example, in the Retirement Division. The weighting is on the three and the five. But again, I'll have Tim help maybe provide some better understandings to steps being taken, and any concerns you might have. Tim?
Yeah, I know. Thanks Suneet. I think investment performance we've seen continue to improve throughout 2019. So as Dan mentioned, the fourth quarter was a tough quarter for us. And you saw the investment performance debt. But I do think that what we're producing our asset management solutions that are for the longer term.
So for the most part, our clients are looking at those long-term numbers and both the three year numbers, the 66% of the solutions, and AUM in the second and first quartile. And then 83% for five years, we think is really good investment performance. And again like I said before, we think it's resonating with our -- with our clients and we're providing the right solutions and the right performance to them.
Just one of the thing I pile on Suneet. The other data point is that 88% of our retail mutual funds have either a four or five star ranking. So again that's -- that's where the flows are going and we're in good stead there. Did you have a follow-up?
Yes, I did. We talked about this on the Wells call as well, but I wanted to revisit now that you've had a little bit more time with it. Any thought to maybe adding more of your PGI funds onto the platforms of the Wells accounts? It seems to me that potentially a big opportunity for you guys. But we haven't really spent much time talking about it.
Yeah. And that's exactly right. I think the big takeaway is we want to make sure that Wells Fargo clients, and their consultants if they're happy with what they currently have we want to honor and respect that. But I will tell you that in working closely with the relationship managers, they are incredibly enthusiastic about some of the investment options that are available, starting with real estate.
Some of these are options that weren't otherwise readily available. So we will continue the knowledge transfer to the relationship managers, and the sales professionals, and those prospective clients, and consultants, on the capabilities and skills that we have in these investment areas. And so we remain optimistic, just like we do in our existing value proposition to our clients, that we have great skills and capabilities across a number of these asset classes, and we'll be having those conversations. But by no means, will they have to move over. It will be simply discussion, and presenting these options to these prospective clients.
The next question is from Alex Scott with Goldman Sachs. Please go ahead.
Hi. First question I had was just on RIS-Spread. I guess -- when I was looking at the net investment income performance this quarter, I even asked, I think some of the prepays and so forth you're calling out. It looks like a pretty strong pickup in NII base yield, which was a little surprising, just in light of the declining rate environment. So I was just interested in any commentary you have there. Is this kind of new level more sustainable, I think it was around 70 bps increase quarter-over-quarter? So, any color there would be great.
Yeah, you've got it down well. Deanna?
Yeah, thanks for the question. I think we did hear last night, and your question says that people thought our net investment income looked a little higher whether it being spread or within all of the US businesses. But actually, when -- I actually think it holds together pretty well. Once you adjust for variable investment income and you take into the account the growth we've seen in the general account or the spread business from a year ago.
So our spread average JV is up 11% on a trailing 12 month basis, 12% from a year ago. And actually if you look at our variable investment income, it's up maybe 15% quarter-over-quarter, but 12% on a trailing 12 month basis. So it's not that significant, we off of the growth in that business. I like to look at that on a longer period of time, as any one quarter can have some anomalies in it.
For example, last quarter we did say that variable investment income was slightly below our expectations, but not enough to call out in any one period. So I think that is influencing that as well. Going forward, there could be some slight pressure on the amount of net investment income that we have if interest rates stay at the current lower level. But I think once you adjust for variable investment income, the growth in net investment income is tracking pretty darn close to the growth in the business.
That help, Alex?
Yeah, that is helpful. And maybe just a follow up. When I think about since the outlook you guys provided about a year ago. The 10 years, dropped about 100 basis points. When I think about that kind of a move, I know PFGs maybe a little less rate sensitive than some peers. But how should I think about the way that you'd expect that the impact the EPS, whether it's this year, thinking about next year? And what are some of the levers that you can maybe pull to offset some of that pressure?
Yes. actually a little bit longer than a year ago, and it's been quite a roller coaster ride if you think about where we were at, where we went to, and where we've returned. And the good news is we don't take a lot of interest rate risk. But Deanna, do you want to help frame that for Alex?
Yeah, I'll actually take you back to our rules of thumb that we have talked about and it was actually included in the slide deck that we put out there. And so that rule of thumb on earnings is a 100 basis point decline in rates has less than a 1% impact on our overall earnings.
Obviously, that could be more significant in the spread business and the Life business, but because of our mix of business, it's less than 1%. The other thing I would say that I think it's really critical, and we said it in our prepared remarks, if you look at our new money yield today, it's pretty darn close to what our portfolio yield is. And so that's going to have less pressure on our overall earnings impact than if there was a big differential between that portfolio rate, and that new money rates. I think it's very, very manageable. You could see some impact, but I think relative to our peers that impact is muted.
Thanks, Alex.
The final question is from Joshua Shanker with Deutsche Bank. Please go ahead.
Yeah, thank you for the meeting today.
Thank you.
Thank you. So if we look at -- like, you know, I read so you had this large mandate outflow in your new mandates coming in. Can we talk a little bit about the impact on AUM, on PGI, from blocking and tackling growing assets versus mandates. Are these mandates lower margin in the rest of the business? Are they higher margin if we think five years ahead? Do we want to win more of these mandates? Of course we do, but they also have a -- they're less margin attractive then growing the business. How should we think about the evolution, I guess, of the AUM trend and what it means for margins overall?
Well, you know, when I think about the evolution of our asset management company, it starts with the fact that we have so many asset raising capabilities embedded within the organization, whether it's the life company, or the mutual fund a capabilities, annuities, retirement, etc. We deliberately have gone out within the last 20 years to build an institutional asset management business, which by its very nature tends to be a little bit more lumpy larger mandates.
What I have found frankly the most refreshing over that period of time is how independently fixed income, equities, real estate alternatives, both domestic, international, have grown and are appealing to all of those client types of that I just mentioned. And maybe with that Tim, you can help us explain the lumpy nature of mandates versus these other opportunities are more consistently flowing in.
Sure. I would say each mandate is quite different and it depends on the asset class that it comes in to. So the big mandate that went out, was an investment grade fixed income mandate. Obviously, those are going to be lower fees. The new mandate coming in on the 529, actually most of the assets will flow into the mutual funds. And so you would see those coming in at similarly attractive fees. I think within our investment management franchise as Dan said, we have a very diverse portfolio of capabilities. And so what we see our pressure in some areas, like with active equities.
And certainly, there has been some pressure on fees coming down in the move to passive. But we have some specialty capabilities as well. So think about our real estate capabilities, think about our preferred security capabilities, high yield. We're still seeing good fee levels on those.
And so, in any given quarter, in any given year, those are going to be a bit lumpy and change. And I think one thing that we'll do going forward is to try to give you more color on what those big mandates and big flows look like, and how you should think about the revenue coming in off of those both on the way in, but also on the way out.
And to that point some of the stated maturities. And that's been some of the lumpiness the last couple of years where it was expected and was going to expire. Did you have a quick follow-up? Okay.
We have reached the end of our Q&A session. Mr. Houston, your closing comments please.
Thank you. Josh, I apologize if you did have a follow-up, gives a call. We'll make sure to get to you. I appreciate everyone taking the time today. We do very much like the way we've gone out capital deployment. These last 12 months we are very bullish as you can take from this call. On the Wells Fargo IRT business, we really are as enthusiastic today as we were when we first started working on the opportunity.
Expense discipline is a big part of what we have done in the past. We'll continue to stay focused on that. I'm very excited about talking in more detail in the future about these digital initiatives, and how they're helping our customers. And then lastly, as you could pick up from the tone of the divisional presidents, latter half of the year for us looks quite good and we like the pipeline, we like the growth in the economy, and where these businesses going. So again thank you for your confidence in the organization. Look forward to seeing you on the road soon. Thank you.
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