LARRY ZIMPLEMAN, CEO OF DES MOINES, IOWA–BASED PRINCIPAL FINANCIAL GROUP, knows how to get what he wants. When Xi Jinping made Iowa one of only three stops on a February trip to the U.S. that included a first-ever meeting with President Obama, Zimpleman worked behind the scenes to make sure he got face time with the man widely expected to become China’s next Communist Party chief and president. Zimpleman had a good reason to want to meet with the current Chinese vice president: Principal, an $8 billion-plus-in-revenue company that develops retirement savings and investment products and has quietly built profitable outposts around the globe, needs China’s approval to sell retirement products in that country. Although Principal has planted its flag there — it has a joint venture with China Construction Bank Corp. to sell mutual funds — it wants the go-ahead to be an enterprise annuity provider so it can complete the next leg of its international expansion.
Zimpleman, who took over as CEO of Principal in 2008, shortly before the financial crisis erupted, needed Iowa Governor Terry Branstad to arrange the meeting. During a trade mission to China last September, Branstad had invited Xi to his state for a reunion with Iowans the Chinese vice president had met on a sister-city exchange in 1985, when he was a young party official from a northern pig-farming region in China and Branstad was serving his first term as governor. On that original visit to the U.S., Xi was looking to draw on Iowa’s expertise in raising fatter pigs and increasing corn and soybean yields.
But Zimpleman, who grew up on a farm in eastern Iowa and didn’t get his first passport until he was 46, wanted Xi and the rest of the Chinese delegation to see his state — and his company, which has invested $1 billion building out its international footprint — as exporters of cutting-edge financial services. Zimpleman is betting that China now needs to worry more about helping its growing middle class save and invest than about getting enough food. Encouraging people to save for retirement is the CEO’s mission for Principal, and he needed Branstad to understand that Iowa’s financial services exports could be as valuable as the state’s agricultural trade. Branstad got the message, and Zimpleman was part of a private reception with Xi that included Michigan Governor Rick Snyder and Kansas Governor Sam Brownback, as well as Deere & Co. CEO Samuel Allen and Monsanto Co. CEO Hugh Grant.
With Branstad and a translator at his side, Xi listened intently to Zimpleman’s pitch that Principal’s joint venture with China Construction Bank should be allowed to extend its business into the retirement area. Without Chinese citizens saving on their own, Zimpleman explained, Xi’s country would face a demographic time bomb as lethal as that already ticking in the U.S. and Europe.
Sure enough, Xi — a likable man with a disarmingly warm smile who is married to popular Chinese folk singer Peng Liyuan — told an Iowa audience soon after his meeting with Zimpleman that the state was a growing exporter of everything from biotechnology to financial services. And he mentioned Principal Financial Group by name during a speech that was streamed live to China — a coup for Zimpleman and his team.
“That was the Good Housekeeping seal of approval,” says the Principal CEO. A photo of Zimpleman meeting Xi in a receiving line during a gala dinner at the state capitol appeared on the front page of the Des Moines Register and in Chinese newspapers.
The imprimatur from Xi is a boost for $335 billion-in-assets Principal, whose culture was forged on the Plains, amid Iowa’s Midwestern work ethic and agricultural economy. China is the next step in the 60-year-old Zimpleman’s grand strategy to make money off every stage of an adult individual’s life cycle, from savings accumulation and insurance when investors are in their 30s, 40s and 50s to products that let those in their 60s, 70s and 80s tap their nest eggs. It’s a strategy not unlike the most popular vehicles at its mutual fund company: target date funds that are designed to shift their investment styles as investors age.
Principal has grown from a mutual insurance company into a financial services powerhouse by capturing the retirement business of small and medium-size U.S. companies largely ignored by the big East Coast asset managers and some insurance companies. Principal realized two decades ago, long before its competitors, that it needed to go after international markets to gain younger customers new to the middle class and at the beginning of their savings lives, to balance its business in the U.S., where aging baby boomers would be starting the tail end of their investing careers and drawing down their accounts. Principal built an innovative defined contribution platform, wrapped a world-class money manager around it to oversee the assets and exported the whole thing to overseas markets, including Brazil and China.
Today, while other firms are thinking about how to recalibrate their operations in a world transformed by the 2008 credit crisis, the continuing tepid economic environment and the resulting regulatory constraints on the financial services industry, Principal is methodically harvesting gains from its long-ago decision to get ahead of the overarching and inexorable power of demographics. Principal also avoided many of the pitfalls other firms faced during the crisis, such as holding residential mortgage securities in its insurance portfolio, dealing in risky variable annuities and having outsize exposure to equities.
Principal’s business has four profit drivers. Retirement and Investor Services, headed by company lifer Daniel Houston, contributed $581.1 million in operating earnings last year. U.S. Insurance Solutions, also managed by Houston, added $215.9 million in earnings. Principal International, headed by Luis Valdés, who helped design Chile’s innovative mandatory defined contribution system in the 1980s and who succeeded former chief Norman Sorensen in February, delivered $154 million in earnings. The asset management arm, Principal Global Investors, which oversees $82.4 billion in assets and is led by James McCaughan — a rare outsider on the company’s senior management team, who was recruited from Credit Suisse Asset Management — chipped in $74 million in earnings in 2011.
Principal, which has a 132-year history and more than 13,000 employees, offers retirement, savings, investment and insurance products to small and midsize businesses worldwide, a market segment that competitors like Boston-based Fidelity Investments and Baltimore’s T. Rowe Price Associates are only now starting to trawl as the large-plan market has matured. For all the expertise that Principal possesses about the retirement market, its secret sauce is its innovative technology platform. While much of its competition was focusing on the high-profile large-plan market, Principal was pouring money and time into its technology; as a result, it has been able to efficiently handle the retirement needs of smaller companies, which typically require more hand-holding and services from their partners.
“They’ve figured out how to make it profitable by sticking to their core,” says Chris Brown, founder and principal of Newton, New Hampshire–based Sway Research, which concentrates on the retirement market. “Others are playing catch-up.”
Principal, which went public in 2001, just one month after the September 11 terrorist attacks, focused on a part of the market that wasn’t particularly sexy and has funneled those profits into establishing a burgeoning international business that has offices in 17 countries, including Brazil, Chile, China, Hong Kong, India, Indonesia, Malaysia, Mexico, Singapore and Thailand. The firm has also made a bet on baby boomers’ insatiable appetite for investment and income products, at a time when entitlement systems are under fire in the U.S. and Europe and officials in emerging markets are thinking through how to avoid the same fiscal mistakes. Last year marked a turning point in China, the most populous country in the world: 50 percent of its population now lives in cities rather than the countryside.
“The middle class around the world will want the exact same things Americans wanted, from cars to investments,” says Zimpleman.
The CEO’s story mirrors that of Principal Financial Group. The son of a rural mail carrier in Williamsburg, Iowa, Zimpleman was the first in his family to go to college. A math whiz, he pursued actuarial science at Drake University in Des Moines and started at Principal — then called Bankers Life Co. — in 1973. He rose through the ranks, helping the company expand into defined benefit plans and later into defined contribution, which would become its core business.
“When Larry speaks, people listen,” says Howard Fluhr, who has known Zimpleman for 25 years and is chairman of Segal Co., a New York–based employee benefits consulting firm. “He never says one thing that doesn’t need saying.”
“Larry has a fundamentally sound understanding of any issue before him,” adds C. Robert Henrikson, former chairman and CEO of Metropolitan Life Insurance Co., who has known Zimpleman for more than 20 years through their public policy work. “Larry does the right thing. He is modest but a highly confident guy. A board can take him to the bank.”
“Larry Zimpleman, like Iowa, is about patience and perseverance,” says Governor Branstad. “Principal has been in international markets for many years now forging relationships, and they are paying off for the company. It’s the same with the wonderful and warm welcome Iowa laid out to Xi Jinping 27 years ago. It has translated into a strong economic partnership with China.”
Principal’s foray into international markets hasn’t been without missteps. The firm’s international business was unprofitable for its first decade, as the lack of a clear strategy had Principal selling life insurance in some countries and health insurance in others. In 1999, at Zimpleman’s suggestion, Principal bought Bankers Trust’s Australian investment management operation from Deutsche Bank, hoping to profit from Australia’s fast-growing defined contribution market. Three years later Principal sold the money-losing business after struggling to integrate it and underestimating the competition from local banks.
Zimpleman was right in identifying Australia as a growth market; the company simply chose the wrong vehicle to capitalize on it. But the Australia failure gave Principal the experience to ultimately turn around the international business. “As much as you might want to surround yourself with a white cottage and a white picket fence so the world is manageable, it’s not,” says the 50-year-old Houston, president of retirement, insurance and financial services, who was born in Council Bluffs, Iowa. “The world is big, and it’s fraught with opportunity as well as risk. We need to manage that appropriately.”
Principal has since chosen to enter many international markets with a marquee local partner, particularly in large countries like Brazil and China. The company has succeeded because it has been able to keep its ego in check and work with local firms in a way that few other big financial institutions are willing to do. Bernard Charnwut Chan, who was elected in 2008 as one of 36 Hong Kong representatives to China’s National People’s Congress, emphasizes that Principal’s ability to prosper far from the frenzy of New York is as much a part of its success as its technology expertise and knowledge of the retirement market.
“What’s different from their peers is that they treasure the relationship with their local partners,” says Chan, who competes with Principal as founding chairman of Bank Consortium Trust Co., a group of eight Hong Kong financial institutions. “I know most of their competitors, and many would go into the market and want to do things on their own terms.”
China Construction Bank, the second-largest commercial bank in the world, with 292 million retail customers, chose Principal from among seven finalists for a now six-year-old mutual fund joint venture because Zimpleman and his team were the only ones to ask the bank what it wanted from the deal, according to sources at CCB. “As a joint venture, we are expecting all parties to contribute together,” says Rex Auyeung, 59, president of Principal International–Asia, who was hired in 1994 from insurance giant American International Group to open the firm’s Hong Kong office. “One company shouldn’t run the whole thing. In Asia it’s all about being humble when it comes to business relationships.”
Principal’s international aspirations aren’t unique. Most major U.S. money managers have been aggressively going after emerging markets for years. Internationally, Principal competes with ING Group, HSBC Holdings and Manulife Financial Corp., as well as a slew of local players. The Iowa company, however, has the whole package: both money management proficiency and the ability to perform recordkeeping for the retirement plans of small and medium-size businesses. “We’re not a manufacturing company where we build pensions in China and deliver them in little containers to Brazil,” says Principal International head Valdés. “The real knowledge is walking and breathing.”
The company has been busy as the economy has emerged from the financial crisis, making four acquisitions in the past year. In April 2011, Principal announced that it was buying HSBC Afore to expand its Mexican pension business, and a majority stake in Finisterre Capital, a London-based emerging-markets investor. In July, Principal purchased a majority stake in Origin Asset Management, a global equity specialist based in London. Just last month it bought a majority stake in Brazil’s Claritas Investments, a $1.8 billion mutual fund and asset management company.
“We’re set,” Zimpleman says. “Now we just need to execute.”
LARRY ZIMPLEMAN IS PROUD OF HIS PASSPORT. DURING a January interview in his wood-paneled office, he gets up to retrieve it from the pocket of his suit jacket, displaying the stamps from Asia and Latin America and showing the extra pages provided for frequent travelers. Later, at dinner at a restaurant near the state capitol in Des Moines’s trendy East Village that was popular with reporters during the Iowa caucuses, he produces his frequent-flier statement detailing the more than 2 million miles he’s flown around the globe.
Even as Zimpleman’s legacy is sure to turn on how a company raised in the cornfields of Iowa gained a stable foothold in emerging markets, his story is a quintessentially Midwestern one. He was born on a Williamsburg farm. His father worked for the U.S. Postal Service, delivering mail from 7:00 a.m. until 1:00 p.m. six days a week. In the afternoons the father, who died in 2009, would tend to the small farm with his son’s help.
As a teenager the young Zimpleman worked pulling weeds for Holden’s Foundation Seeds (in a testament to Iowa’s riches, Holden’s was later bought by Monsanto in a $1 billion deal as the market for genetically modified seeds heated up). At the age of 16, Zimpleman drove a truck for Holden’s and managed a young, hardscrabble group of field hands. “Ninety percent of what I learned about management I picked up as a 16-, 17-year-old kid trying to keep everybody else from falling out of the back of the pickup truck or stabbing each other,” he says.
His elementary school German teacher, who later became a guidance counselor, encouraged him to study actuarial science. Though he didn’t know what an actuary was, Zimpleman tucked the thought away and later attended Drake University to study the esoteric subject, which uses mathematical methods to assess insurance risk.
Working to put himself through Drake, where he is now a trustee, he discovered a newly formed scholarship program for actuaries at Bankers Life. The program, in which Zimpleman worked a 35-hour week, helped pay for his tuition and gave him an entrée into the company after he graduated. In Des Moines he reconnected with a woman from Williamsburg who would later become his wife. Now married 38 years, Kathi and Larry have three grown sons.
Bankers Life was founded in 1879 to sell life insurance. In the 1930s it began making residential loans; it went on to become one of the top mortgage companies in the U.S. After World War II it launched a group benefits business as salary freezes led companies to start offering rich perks like pension plans. The pension unit laid the groundwork for Principal’s core business today.
The company also took a different tack when it came to investing. Bankers Life ventured beyond the standard fare for insurers — publicly traded bonds — and developed its own investment analysis, equity management and, most important, commercial real estate capabilities. The effort ultimately led it to offer investment services to third parties and later became the basis for Principal Global Investors.
Zimpleman graduated from Drake on a warm, sunny Saturday in May 1973, spent the rest of the weekend studying, took one of a series of actuarial exams on Monday and started work at Bankers Life the very next day. In 1976, after rotating through a number of departments and finishing his actuarial exams, he was offered a position in the pension department.
President Gerald Ford had signed the Employee Retirement Income Security Act into law on September 2, 1974. ERISA, which among other things required U.S. companies that provided pension plans to meet minimum funding requirements, would transform Bankers Life from a regional mutual insurer into a national retirement provider. The esoteric law was also a boon to the career of Zimpleman, who became known as a pension expert. Zimpleman helped move his company into providing services for defined contribution plans, which few people at the time thought would catch on, as the rules were still vague and the benefits not clear.
In 1985 the company changed its name to Principal Financial Group. All the while, it stayed slightly under the radar, focusing on providing retirement plans for small and midsize businesses, selling through its own agents and third-party insurance brokers. In 1990 then-CEO G. David Hurd launched Principal International.
“Dave argued that there were offensive reasons to do it: growing populations and less competitive markets,” recalls Zimpleman. “But interestingly, he said that we needed to make sure that we’re not held hostage to either an economic or market environment in the U.S. that could hurt us in the long term.”
Insurance was a staid business, but international markets offered the lure of double-digit growth rates. Hurd and his team presciently predicted that Asian and Latin American governments would see the advantages of private retirement savings programs over public ones like the U.S.’s overburdened Social Security system. Principal entered Mexico in 1993, Chile in 1995 and Hong Kong in 1996. Auyeung, a Hong Kong native, had never heard of Principal or Des Moines before being recruited by a headhunter to help the company gain a foothold in Asia.
By the mid-1990s, Principal was facing a dilemma. The company, which was owned by its 700,000 life insurance policyholders, had outgrown its mutual ownership structure. David Drury, who had become president in 1993, contended that Principal should be demutualized. Although its retirement business was powering the company, the profits were being distributed to a small group of life policy owners, says Zimpleman, who at the time ran about half of Principal’s retirement business, including marketing and sales.
Drury started preparing to go public, while grooming his successor, J. Barry Griswell, whose ebullience and chatty personality stood in strong contrast to Drury’s natural quiet. Griswell, a 6-foot-9 former college basketball player, had moved to Des Moines in 1988 from MetLife Marketing Corp. in New York to run Principal’s sales organization.
Drury was hell-bent on making sure no one could accuse him of demutualizing the firm — whose shares would be distributed to policy owners — for his own benefit. “I wanted to be able to stand up in front of the insurance department and say, ‘Look, this is for the good of the company,’ ” he explains in a breakfast interview at a French bakery in the Roosevelt neighborhood on the western edge of Des Moines.
Principal International, however, was bleeding money. The company, which sold insurance in Spain and had outposts in Argentina, Indonesia and other locales, lost $48 million in 1998. Principal decided to get out of the international insurance business, where the competition had been fierce, and instead focus purely on retirement.
Griswell became president of Principal in 1998 and hired Sorensen to run the international operation. Sorensen — a multicultural globe-trotter whose mother was Uruguayan and father Danish — had been working for Evan Greenberg at AIG, running a large joint venture for the insurer in São Paulo. “The reason for bringing Norman on board was his experience in knowing how to manage far-flung businesses, which quite frankly we didn’t have,” says Zimpleman, who wanted Sorensen to help the company export its retirement services platform to non-U.S. markets.
Sorensen “broke a lot of glass” when he arrived at the company, says Ned Burmeister, Principal International’s COO. The new head of international operations was impatient to turn things around. He didn’t care if he made a few employees cry along the way, and he did. “When Barry hired me in ’98, he said, ‘How soon can you break even?’ ” recalls the now silver-haired Sorensen. “I said, ‘Look, Barry, you’re losing more than $40 million aftertax. What do you expect, miracles?’ Well, miracles are possible.”
Zimpleman, who up until that point hadn’t ventured far from Iowa, got his passport and set out to identify where Principal should focus its efforts. He looked for countries that were dominated by small to medium-size businesses — Principal’s area of expertise — and had large enough populations to make a 10 percent market share profitable. He nixed countries like the U.K., where local firms were entrenched and willing to fight hard to keep their upper hand, and regions such as Eastern Europe that lacked the legal and regulatory protections found in the West.
He initially identified a half dozen countries, among them Brazil and Japan, that met his criteria. The list also included Australia, where Principal made its ill-fated foray in 1999, paying $1.38 billion for Bankers Trust Australia Group, which owned the country’s second-largest investment management business, BT Funds Management. The strategy “was incredibly vulnerable to investment banks that will sell you anything,” says Burmeister, referring to the challenge of making acquisitions outside the U.S.
Zimpleman and Sorensen decided that Principal needed to stop trying to run its non-U.S. businesses from Iowa and give local managements more autonomy. In 1999, Principal moved Valdés, who was then living in Des Moines, to Santiago to open a Latin American headquarters for the company. The two executives, however, disagreed about how to handle information technology for the various country initiatives. Sorensen, who thought IT should be decentralized, prevailed. Today, Principal’s country operations customize their own systems.
Principal was quick to see the value of joint ventures, working with local partners to distribute its retirement and asset management products. In 2001 the company struck a deal with Banco do Brasil, the largest bank in Latin America, and took a stake in Brasilprev, a small, unprofitable pension company run by Banco do Brasil and another partner. Principal entered India in 2000 through a 65 percent joint venture with Punjab National Bank, the country’s second-largest bank.
“All of our joint ventures have been profitable from day one,” says Sorensen. “The JV partners believe in our DNA.”
ON MONDAY, SEPTEMBER 10, 2001, Griswell, who by then was CEO, and Zimpleman, then an executive vice president, led a team of Principal executives to Europe for a series of meetings with potential investors ahead of the company’s IPO. The next afternoon they watched from Paris as New York’s Twin Towers collapsed and the financial system shut down. With air traffic halted, the group had to wait until Friday before they could charter a plane. After landing in Iceland, they made it as far as Winnipeg, Canada; from there they hired a van to take them across the border to the U.S. After a harrowing trip — the elderly driver ran the van off the road during a rainstorm, shattering the windshield — the executives finally made it to Sioux Falls, South Dakota, where Principal’s plane could retrieve them.
With the U.S. equity markets initially in free fall after reopening on September 17, Griswell, Zimpleman and the other members of Principal’s management team decided to continue with the IPO. Principal became the first major company to go public after 9/11, pricing its deal at $18.50 a share on October 22. The company ended its first day of trading at $21 a share, giving it a market capitalization of $7.6 billion. Principal employees cried as they watched the IPO news from New York on a giant screen set up outside their Des Moines headquarters.
Emotions soon gave way to reality. With analysts digging into the company’s numbers, Griswell had little choice but to deal with the cash-burning international business. The BT purchase in particular wasn’t working out. Principal knew Australia was a huge potential market — every worker there is required to make mandatory contributions to a defined contribution plan — but it underestimated how banks would quickly dominate and squeeze out independent players like BT.
It was a big defeat for Principal. “Every Monday I would get the bad news from the CEO down in Australia, and I’d have to talk to the Street,” Griswell says. “This was getting brutal.” He ended up selling most of the firm to Westpac Banking Corp. for $900 million in 2002.
The BT acquisition did give Principal some international distribution capabilities and the seeds for its Southeast Asia business; the company kept a passive share in an asset management company owned by BT that was the predecessor to CIMB Group Holdings, a Kuala Lumpur, Malaysia–based regional bank.
Griswell had promised investors in the IPO that Principal would turn its asset management arm, which had $14 billion in assets unaffiliated with its insurance portfolio, into a global player. He hired McCaughan, who had been running the Americas unit at Credit Suisse Asset Management in New York, in March 2002. McCaughan had a proven track record of turnarounds and global expansion.
The talkative Scotsman’s work was cut out for him. Performance was average, assets were largely fixed income, and there was no strategy to grow. He started by adding analysts, freeing analysts from client service duties and hiring institutional salespeople. He also changed the way portfolio managers would be compensated: They would earn substantial bonuses if they performed well but would receive none if they fell below the median returns for their strategies.
The 59-year-old McCaughan inspires intense loyalty from his staff, even if he is challenging. “Jim throws you into the shark tank, and if you’re only missing a leg but can still float, he considers that a success,” says Ellen Shumway, executive director of strategy and boutique operations for Principal Global Investors.
More important, McCaughan championed a multiboutique model in which Principal bought managers outright and gave them autonomy but centralized noninvesting activities like distribution. It also started carving out its in-house managers into boutiques and giving them profit sharing. McCaughan’s strategy benefited from pieces of the BT business that Principal had retained, including an offshore fund platform in Dublin and an institutional mutual fund business in Australia.
Under McCaughan, Principal started making acquisitions. It bought Post Advisory Group, a Los Angeles–based high-yield bond manager, and Columbus Circle Investors, a growth manager in Stamford, Connecticut. McCaughan believes that the boutique model allows Principal to be creative and attract hungry managers. “The trouble in investment management is that not a lot is unique, as the business is so fragmented,” he explains. “This model supports innovation.”
Principal set its sights on international markets that Zimpleman had already identified, even if they weren’t fully privatized. The company entered Malaysia in 2003 in conjunction with CIMB and has since launched mutual funds and institutional strategies for Muslims that follow the laws of shari’a, which include prohibitions against investing in companies that charge interest. Although Malaysia has an almost 45-year-old system that requires employees to contribute 11 percent of their salaries to a defined contribution plan, the government still manages the money. As pressure from middle- and upper-class Malaysians to increase their investment choices grows, the government is expected to hire outside firms to help manage its system.
In 2005, Principal began offering mutual funds in China in partnership with CCB. It moved into Singapore the following year and into Indonesia and Thailand in 2007 and 2010, respectively, betting on the growth of the middle class in those emerging markets.
Principal International made its first profit in 2001 — $6 million — and by 2005 had $71 million in operating earnings. Burmeister, who originally joined Principal in 1979 as an actuarial student, says the key to the company’s success internationally has been its willingness to play the role of consultant. “You could say, ‘They can’t be nearly as smart as me, so I have to educate,’ or you could say, ‘I’m a consultant and should be able to bring them the 130 years of experience of Principal in the U.S.,’ with the great hope that it will help them be successful,” he explains. “It’s hard to do. It takes a long time.”
On May 1, 2008, Griswell retired as CEO and was replaced by Zimpleman. By then Principal’s international business was thriving, and Griswell, who stayed on as chairman, pushed for the company to hold its board meeting and annual strategic retreat that fall in Hong Kong. Griswell flew to Hong Kong on September 15. By the time he got off the plane, investment bank Lehman Brothers Holdings had filed for bankruptcy. Two days later, during the retreat, news broke that the U.S. government would pay $85 billion to bail out troubled insurer AIG. The world had changed.
Despite Principal’s steady fee revenue, the market was undiscriminating and unforgiving, driving down the company’s shares from about $52 on September 19 to $5.88 on March 9, 2009. During the first quarter of 2009, Wall Street analysts pounded the company over fears about its investment portfolio. Although Principal had little exposure to residential mortgages and didn’t invest in the kinds of toxic securities that had sunk AIG and Lehman, analysts were nonetheless concerned about mounting unrealized losses in its investment portfolio as a result of the deep freeze that had enveloped the credit market.
On conference calls Principal CIO Julia Lawler, who managed the portfolio, was constantly on the defensive. “There were two concerns from investors and analysts in the first quarter of 2009,” she says. “One was that unrealized losses had mounted severely; then analysts focused on our commercial real estate exposure. But we didn’t have to sell. Our liabilities were distinctly different from bank liabilities. Our liabilities can’t run out the door.”
Zimpleman started talking to his father on Wednesdays for moral support in addition to their weekly Sunday calls. And he made a few changes to help pull the company through the financial crisis. Most important, he reduced the size of the balance sheet of Principal’s life insurance business by selling fewer guaranteed investment contracts and medium-term notes. When the crisis hit, Principal had $21.7 billion of these institutional funding agreements with three- to seven-year maturities; now its portfolio is about $11.7 billion. Zimpleman also decided to get out of the medical insurance business.
In 2009, Zimpleman added the title of chairman to his résumé when Griswell retired. By the second quarter of that year, things had steadied. Principal reported $200.5 million of operating earnings, down from $254.1 million for the same time period the year before but up 22 percent from the previous quarter. In 2009, Principal raised $1.9 billion in new capital — $1.15 billion from equity and $750 million from long-term debt — largely to show that it could. “We didn’t need the money, but companies wanted to know that you could raise it if you needed to,” Zimpleman explains.
LAST FALL, IN THE RUN-UP TO THE January Iowa caucuses, Republican presidential hopeful Newt Gingrich visited Principal’s Des Moines headquarters. His campaign had only recently become reenergized, and the former speaker of the House wanted to learn about alternatives to the U.S.’s Social Security system to try to keep up the momentum. Zimpleman and his management team talked to Gingrich about Chile’s system, one of the oldest mandatory defined contribution programs in the world, dating back to 1981. Gingrich later mentioned Chile — and Principal — during a Republican debate.
The candidate’s name-dropping was less important in and of itself than it was indicative of how the company’s message — taking responsibility for your own retirement — had become a part of national and global politics. An arcane subject has taken center stage.
Zimpleman says his biggest worry is not competitors encroaching on his turf; it’s that individual investors in the U.S. will permanently lose faith in equities as they struggle with news of high frequency trading, the “flash crash” and the specter of “black swan” events like sovereign credit defaults. He is concerned that these investors will withdraw from the market in the face of what they feel is a rigged casino where the insiders take home all the chips. To be sure, U.S. investors have continued to put money into bond funds at the expense of stock offerings.
Regardless of what investors ultimately do, Zimpleman likes the way that Principal’s business is currently structured — in particular, its position in growth markets outside the U.S. In a recent board presentation, he said the company would not make any “big arm movements” but would walk further down the roads it already has paved.
Principal has long hewed to a philosophy of aiming for both profitability and growth. “Some companies focus on one or the other,” says Zimpleman. “What’s really tough — what’s really tough — is, we’re trying to have this portfolio of businesses that gives us above-industry growth while maintaining industry-average profitability.”
One of Prinicipal’s biggest growth opportunities is in Brazil, a country famous for its Carnival, beaches, young population and economic vibrancy. Roberto Walker, who succeeded Valdés as head of the Latin American region for Principal after helping run its operations in Brazil, Chile and Mexico, is optimistic about the potential. He says that as interest rates continue to fall in Brazil — the central bank has cut its benchmark Selic rate by 2.75 percentage points, to 9.75 percent, since August — investors will want to put money into equities and invest outside the country. Although the shift is likely to take several years to happen in a meaningful way, Walker says, he envisions Principal Global Investors ultimately managing those assets.
“No one is interested in international diversification or equities when you’re in a country with one of the world’s highest interest rates,” he adds.
In Brazil, Principal introduced its first target date retirement funds, which bundle multiple asset classes, five years ago, when the Selic rate was about 13 percent and most market pundits didn’t believe that investors there would veer away from short-term fixed-income securities. But they have, and Principal is the leader in the burgeoning market for such one-stop funds. The company plans to add international funds and hopes to pick and choose other strategies from Principal Global Investors as regulations continue to change. Principal’s efforts will also get a boost from the company’s recent acquisition of a majority stake in São Paulo–based asset manager Claritas.
Although Brazil is already the most profitable country for Principal, the market still has enormous growth potential, says Walker. In the company’s Brazilian joint venture, Brasilprev, the majority of the 1.4 million customers are individuals seeking retirement solutions. That leaves 43.4 million untapped Banco do Brasil customers who are potential buyers of annuities and other retirement products. The bigger opportunity, Walker says, is the employer business, which is only beginning to be tapped and is still developing. “As the labor market gets tighter, people will demand benefits like defined contribution pensions,” he adds.
The Asian market, however, is still nascent for Principal, which has operations in China, Hong Kong, India, Indonesia, Malaysia, Singapore and Thailand. Pension reform is a new concept in that part of the world and has taken time to yield results. “I joke that Roberto [Walker] is managing three teenagers with muscles,” says Principal International–Asia president Auyeung, referring to the company’s efforts in Brazil, Chile and Mexico. “I’m nurturing seven young kids.”
For his part, Auyeung has tried to enter markets early with products like mutual funds “to establish a beachhead, a reputation and a brand,” he explains. “You need a legitimate presence to start to talk to the regulators.”
Principal International needs to shift from a start-up to a business with all the trappings of maturity. Valdés says he is thinking hard about expansion, including how to develop his people, given that only ten years ago Principal International was still in survival mode. “The main challenge that our management team is facing is to develop a strong sense of strategic development,” he says.
Progress in Asia is coming. Principal was recently approved to be a Qualified Foreign Institutional Investor (QFII), a designation that allows it to invest in China on behalf of foreigners. Zimpleman doesn’t think the approval was an accident, even if it came before Vice President Xi’s visit to Iowa. His company, after all, has been in Hong Kong since 1996 and has had its joint venture with CCB for six years. Principal likely benefited from the appointment of former CCB chairman Guo Shuqing as chairman of the China Securities Regulatory Commission, the agency that oversees the financial markets.
Principal manages $19.1 billion in Asian assets, including $7.2 billion in China. Zimpleman looks at that country’s enterprise annuity plans, a defined contribution program designed to supplement the government’s public plan, as a major future growth driver for Principal in Asia. Although these plans have been slow to take hold because of regulated fees, small margins and no tax advantages, the new government next year is expected to address some of these shortcomings as China wrestles with the demographic challenges of its aging population.
Zimpleman, a modest man who owns just one house and always speaks at the same volume, was visibly excited the day after his meeting with Xi — because of what it meant both for Principal and for Iowa’s economy. “Financial services are not as tangible a product as corn or soybeans,” he told Institutional Investor. “Our knowledge and experience are what we’re exporting. You can’t put a dollar value on that.”
During his February visit to the U.S., Xi invited Governor Branstad, his wife and the Iowans with whom he stayed in a split-level Midwestern home on the banks of the Mississippi River in 1985 to the ceremony that will make him the next president of China. Xi will govern a country of modern economic dreams, both for the Chinese and for Americans. There’s no doubt that the governor is planning to attend his historic inauguration. Now Larry Zimpleman needs to get his ticket to China and his passport stamped again. • •
