Principal Financial Group, Inc. (NASDAQ:PFG) Q1 2024 Earnings Call Transcript

Principal Financial Group, Inc. (NASDAQ:PFG) Q1 2024 Earnings Call Transcript April 26, 2024

Principal Financial Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. And welcome to the Principal Financial Group First Quarter 2024 Financial Results. There will be a question-and-answer session after the speakers have completed their prepared remarks. [Operator Instructions]. I would now like to turn the conference call over to Humphrey Lee, Vice President of Investor Relations.

Humphrey Lee: Thank you and good morning. Welcome to Principal Financial Group’s first quarter 2024 earnings conference call. As always, materials related to today’s call are available on our website at investors.principal.com. Following a reading of the Safe Harbor provision, CEO, Dan Houston, and CFO, Deanna Strable, will deliver some prepared remarks. We will then open up the call for questions. Other members of senior management will also be available for Q&A. 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 financial measures. Reconciliation of the non-GAAP financial measures to the most directly comparable US GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. Dan?

Daniel Houston: Thanks, Humphrey. And welcome to everyone on the call. This morning, I will discuss key milestones and highlights from the first quarter as we continue to execute our strategy with discipline and focus, and deliver strong results for our customers and shareholders. Deanna will follow with additional details on our results and our capital position. The first quarter of 2024 was a good start to the year for Principal. We reported $394 million of non-GAAP operating earnings or $1.65 per diluted share, an 11% increase in EPS over first quarter of 2023. Across the enterprise, we continue to focus on growth while balancing disciplined expense management, investing for growth and innovation in our businesses, and returning excess capital to shareholders.

We remain well positioned to deliver on our outlook for 2024, as well as our long-term financial targets. We returned more than $360 million of capital to shareholders in the first quarter, including $200 million of share repurchases. We raised our common stock dividend for the fourth consecutive quarter, aligned with our targeted 40% dividend payout ratio. Strong sales and favorable market performance contributed to total company managed AUM of $709 billion at the end of the quarter. We generated nearly $1.5 billion of positive total company AUM net cash flow after adjusting for the redemption in PGI that we discussed on recent calls. In Principal Asset Management, PGI generated positive institutional net cash flow as private real estate continued to attract investors and we saw renewed demand for specially fixed income investments.

In addition, general account flows were also strong in the quarter. PGI sales were strong in the first quarter, including a rebound in US mutual fund sales. It was the best quarter for mutual fund sales in two years, driven by wins across equities and preferred securities. Principal International net cash flow was positive $1 billion, our strongest quarter since 2021, driven by robust sales in Brazil. Principal International ended the quarter with $179 billion of total reported AUM. Favorable market performance and strong net cash flow were more than offset by foreign currency headwinds, primarily in Chile. While persistently high inflation and low unemployment could keep the Fed from cutting rates in the near term, we remain optimistic that investors will continue to move money into longer duration and higher yielding assets based on our engagements and conversations with customers and distribution partners.

Turning to US retirement, RIS generated strong revenue and earnings growth in the first quarter. Margins remained stable and at the high end of our guidance as we continue to focus on revenue generation while investing for future growth. Importantly, the fundamentals of our retirement business remain healthy, with strong contract retention, as well as increases in re-incurring deposits, participant deferrals, and employer matches. Total retirement sales grew 6% over the year-ago quarter, and the pipeline remains strong. This included more than $750 million of pension risk transfer sales in the first quarter, building on a $2.9 billion of PRT sales in 2023 across 73 contracts. 2023 LIMRA rankings for PRT were recently released and Principal ranked number four in industry based on premium and number three for number of contracts.

We are the only PRT provider in the top five for both metrics, solidifying our leadership position in this attractive market and supported by our market-leading defined benefit business. We continue to leverage our favorable market position in the retirement industry with a full suite of solutions, and we are optimistic on the momentum we’re seeing across our retirement platforms. This week, Department of Labor published its final rule defining fiduciary investment advice under ERISA and revised related regulatory exemptions. Principal has a history of effectively adapting and responding to regulatory change, while continuing to meet customer needs, and we’ll do the same with this latest rule. We are analyzing the final rule and what it means for our intermediaries we work with along with our plan sponsors and participants.

We are encouraged that the DOL confirmed and protected the importance of financial education within the workplace retirement plans with language affirming that educational support to retirement savers enforces positive savings behaviors. Having said that, we remain concerned it will have an unintended consequence of limiting consumer access to meaningful financial tools and advice, on top of creating significant compliance costs for firms. In Benefits and Protection, record sales along with employment and wage growth drove an 8% increase in premium and fees and specialty benefits over the first quarter of 2023. More than half of this growth is from net new business, demonstrating our competitive advantage by focusing on the underserved, small to mid-sized business market.

We continue to grow faster than the industry by deepening relationships with key distribution partners and with our customers. The life insurance premium and fees for the total block increased 4% over the first quarter of 2023, including a 23% increase in the business market. Our focus on business market and SMBs are driving growth across the enterprise. More than half of our first quarter non-qualified sales were part of a total retirement solutions plan. I’m excited about the opportunities across Principal and remain confident that our focus on higher growth markets combined with our integrated product portfolio and important distribution partnerships will continue to create value and drive growth. Before turning it over to Deanna, I’d like to highlight the strong progress we’ve made against our sustainability goals.

We’ve taken a measured approach to sustainability, ensuring our commitments, such as supporting the growth of diverse small businesses, accelerating the execution of our business strategy. And in recognition of strong corporate governance, Principal is once again named one of the world’s most ethical companies by Ethisphere, recognizing ethical leadership and business practices. This is our 13th time on this list since it was launched in 2006. Approaching our 145th anniversary, we’ve always recognized the importance of keeping our promises while building a track record of progress on issues that matter to our customers, employees, businesses, and communities. Building trusted, meaningful relationships across all stakeholders continues to be a bedrock for driving growth into the future.

Deanna?

Deanna Strable : Thanks, Dan. Good morning to everyone on the call. This morning, I’ll share the key contributors to our financial performance for the quarter, as well as details of our capital position. First quarter reported net income was $533 million. Excluding exited business, net income was $376 million, with minimal credit losses of $19 million. Excluding significant variances, first quarter non-GAAP operating earnings were $419 million or $1.75 per diluted share. EPS increased nearly 10% over the first quarter of 2023, stronger than we expected heading into the quarter. This was aided by top line growth and market outperformance despite pressured foreign currency translation impacts. We’re confident in our ability to deliver on our targeted 9% to 12% EPS growth for the full year.

As detailed on slide 12, significant variances impacted non-GAAP operating earnings by a net negative $34 million pre-tax, $25 million after tax, and $0.10 per diluted share. Favorable [indiscernible] performance was more than offset by impacts from variable investment income and a GAAP-only regulatory closed-block dividend adjustment in life. Looking at macroeconomics in the first quarter, while markets were generally favorable across the board, the S&P 500 performed better than mid-cap, small-cap, and international equities, as well as fixed income and alternatives. While the S&P 500 is a conventional gauge for market performance, it is important to note that our equity exposure is more diversified. When you break down the equity portion of PGI AUM, approximately 40% of our exposure is S&P 500, 30% small and mid-cap, 20% international, and 10% REITs. Foreign exchange rates were a headwind relative to both the first quarter and fourth quarter of 2023, but remained a tailwind on a trailing 12-month basis.

Turning to the business units, the following comments exclude significant variances. RIS pre-tax operating earnings increased 7% over the first quarter of 2023, driven by growth in the business, higher net investment income, and favorable market performance. Margin remains strong and at the high end of our guided range. PGI’s pre-tax operating earnings increased 4% over the first quarter of 2023, as the benefit from market performance was partially offset by the impact of recent redemptions as well as lower transaction and borrower fees and immaterial performance fees. The expected first quarter seasonality that we discussed on last quarter’s call played out as we anticipated. PGI had approximately $25 million of higher deferred compensation and elevated payroll taxes, slightly higher than the impact in the first quarter of 2023.

In PI, strong performance in Latin America was muted by impacts of unfavorable foreign exchange, as well as macroeconomic headwinds in Asia. Specialty benefits pre-tax operating earnings increased 12% from the first quarter of 2023, driven by growth in the business and more favorable underwriting experience. The underwriting results reflect the seasonal pattern of dental claims, which tend to be higher in the first half of the year. In life, pre-tax operating earnings were impacted by typical first quarter seasonality and some higher non-qualified surrenders, which can be volatile quarter to quarter. Across the businesses, we remain confident in delivering on our revenue growth and margin guidance for the full year anchored to our long-term financial targets.

Turning to capital and liquidity, we are in a strong position with approximately $1.4 billion of excess and available capital, including approximately $1.1 billion at the holding company, which is above our $800 million targeted level and $300 million in our subsidiaries. Our risk-based capital ratio was approximately 400%, in line with our RBC target. As shown on slide 3, we returned more than $360 million to shareholders in the first quarter, including $200 million of share repurchases and $162 million of common stock dividends. We continue to expect to deliver on our targeted 75% to 85% free capital flow for the full year. As discussed on last quarter’s call, free capital flow is always the lightest in the first quarter due to timing of capital generation and increases throughout the year.

We are committed to returning excess capital to shareholders and continue to expect $1.5 billion to $1.8 billion of capital deployment for the full year, including $800 million to $1.1 billion of share repurchases. The pace of share repurchases will increase throughout the year as free capital flow increases. Last night, we announced the $0.71 common stock dividend payable in the second quarter, a $0.02 increase from the dividend paid in the first quarter and an 11% increase over the second quarter 2023 dividend. This is in line with our targeted 40% dividend payout ratio and demonstrates our confidence in continued growth and overall performance. Our disciplined capital management strategy is aligned with our commitment to deliver long-term enterprise growth, while allowing a significant amount of capital to be returned to shareholders.

Based on net income excluding exited business, we target 15% to 25% to organic capital to support growth in our businesses, 40% to common stock dividends, 35% to 45% to share repurchases, and up to 10% to strategic M&A to enhance our capabilities and support organic growth. We remain focused on maintaining our capital and liquidity targets at both the life company and the holding company, and will continue a balanced and disciplined approach to capital deployment. Our investment portfolio remains high quality, aligned with our liability profile, and well positioned for a variety of economic conditions. The commercial mortgage loan portfolio remains healthy. As discussed on our last call, we had one scheduled loan maturity in the first quarter in our office portfolio, and it was paid off in January.

The remainder of the office portfolio and the underlying metrics are relatively unchanged from last quarter. In closing, I am proud of our first quarter results, demonstrating the power of our higher growth, higher return, and more capital-efficient portfolio. We are in a strong financial position and are well positioned to deliver on our Enterprise 2024 targets, including 9% to 12% growth in earnings per share, increasing return on equity, and 75% to 85% free capital flow conversion. We are grounded in our growth drivers of retirement, asset management, and benefits and protection and executing on a strategy focused on continuing to drive long-term shareholder value. This concludes our prepared remarks. Operator, please open the call for questions.

Operator: [Operator Instructions]. The first question comes from Ryan Krueger of KBW.

See also 15 Best Alternatives to Dyson Airwrap and 15 Best Low Cost ETFs.

Q&A Session

Ryan Krueger: My first question was on PGI flows and I guess, in particular, can you provide some more color on the conversations you’re having and kind of the optimism you discussed in the prepared remarks for continued improvement and allocations to yield products going forward?

Daniel Houston: Kamal Bhatia is here with us to replace Pat Halter. He’s certainly getting well-grounded after having been with us now for four years and an industry vet. So with that, I’ll ask Kamal to respond directly.

Kamal Bhatia: Ryan, I’ll just reiterate something Dan said and give you additional data points that will help you with your question regarding what we see from a sentiment perspective. As you saw, we had a very good flow quarter, particularly on the institutional side with real estate and fixed income. And also, as Dan mentioned, we had our best quarter in mutual fund sales in two years. So I’ll give you three data points from a global perspective. The first one is retail. And as you saw, we are seeing encouraging signs of turnaround in retail. More interestingly, retail flows are difficult to predict. But we have a different momentum with our client base right now. We see interest expanding across sophisticated gatekeepers, particularly with our higher revenue fundamental equity strategies.

And some of these mandates are significantly higher sized. But they will continue to be lumpy. That is the big change in the retail space, unlike a trickle that would come from the advisory base. The other data I would point to you is we are seeing early signs with our real estate business. As you know, we have roughly $6 billion of unfunded capital commitments in our institutional real estate strategies, which we project to call over the next 18 to 24 months. These are predominantly in closed-end funds and separate accounts. We are seeing early signs of value emerging in that market to call capital, but we will have to do so on a selective basis as these opportunities emerge. One of the things I would highlight as these opportunities emerge.

One of the things I would highlight for you is sellers are finally reconciling to a higher plateau in rates, and that’s creating a better environment for us as investors in that space. And then the last thing to your question on where we see in global asset management, this was a very strong quarter for our international business, particularly in Latin America, and we anticipate positive momentum for the rest of the year, particularly with our Brazil pension business and our Mexico funds business as well. So overall, encouraging signs in retail. We continue to see more interest from our institutional client base and our international segment is continuing to scale up.

Ryan Krueger: Just the follow-up was on the fee rate. Down some year-over-year, 28 basis points in the quarter. What are your expectations on the fee rate in PGI going forward?

Daniel Houston: 28 basis points to 29 basis points is where we said it would be and it falls within that range. And maybe, Kamal, any additional comments you’d like to make there?

Kamal Bhatia: I’ll give you a couple of data points on that, Ryan, as well. Maybe three data points, as Dan said. We remain comfortable in managing to our 28 basis points to 29 basis points. So just with respect to 1Q, market conditions did shift the product mix, which impacted our revenue. As you heard in our comments earlier, if you exclude the previously communicated large outflow at the beginning of 1Q, our flows were positive. The other change in the revenue rate for 1Q was based on annual price reviews on our US mutual funds and some of the real estate valuations late in fourth quarter, which also had some additional effect. I would point to the – moving forward when I look at the revenue rate, I think the strong institutional real estate flows and fixed income flows, our fixed income sales are continuing to happen in the high yield credit space, which is a strength of ours, but also an area where generally it’s good for management fee rate.

And we also are continuing to see retail flows improved, which traditionally go to higher revenue and higher margin products such as equity mutual funds. I would also reiterate for you because clients obviously pay keen attention to performance, and that drives flows and growth in management fee rate. We had a very, very strong investment performance track record this last quarter. In particular, I would highlight for you the substantial improvement in our multi-asset strategies that drives our future retirement flows. So the shift towards private assets, which we see improving over as the year goes by, should help with the performance rate as well.

Operator: The next question is coming from Suneet Kamath of Jefferies.

Suneet Kamath: Just a question on RIS fee. I guess we’re all sort of going on the assumption that we’re going to be in a high for longer rate environment. So just curious if that’s having any impact on the participant level withdrawals one way or the other. And maybe if you can talk a little bit about what you’re seeing at the participant level, maybe currently versus prior years.

Daniel Houston: Chris, please.

Christopher Littlefield: On a participant basis, we are seeing a little bit of an uptick in the participant retirement withdrawals. So, again, that’s going to really be impacted both by the strong equity markets, which actually increases account values. And then when they take the withdrawals, that has a bit of an impact. So we are seeing some elevated activity in participant withdrawals in the first quarter, and we’ll be monitoring those elevated withdrawals through the balance of the year.

Suneet Kamath: [Multiple Speakers] make any comments with regards to the higher interest rate environment and how we might see that play its way through in terms of asset capture, perhaps, at benefit event.

Christopher Littlefield: Well, we definitely are seeing the benefit from higher interest rates in RIS. And certainly, we’re getting some benefit as we capture participant accounts on rollover. To the extent that we capture those accounts either in IRA rollover [indiscernible], we definitely are seeing some benefit in bank in terms of those higher interest rates as well. So, we do see retirement withdrawals. We capture some of those withdrawals on rollover. And to the extent they end up within our bank product, we do see some benefits from that as well.

Suneet Kamath: That’s actually where I was going to go next. I think, Dan, in the past, you actually used to give us a stat on that. Like, when you have a benefit event, what percentage of the assets you guys retain. So I’m just curious if there is a stat that you can give us there, and I don’t know if you have any sense on how that would compare to sort of the overall industry.

Christopher Littlefield: I think competitors generally don’t disclose that, and so we don’t disclose that at this point.