So without question, the ability for us to continue in the normal course of business, of providing that participant insights is now affirmed, it seems, from the initial read on the red. Likewise, for those individuals who are asking for advice, Principal has had a 25-year history of having that capability inside Principal to help provide the guidance and the advice necessary to have the right products to do so. And as I said earlier on that call, there are instances where we’re handing that call back off to the original plan, the advisor who sold the plan originally. At the end of the day, this is going to be around making sure that we have all the proper rules in place, all of the scripts were necessary, and then of course, maintaining compliance.
So I think the bottom line is we’ll manage our way through this as we have all the other times that we’ve had these sort of regulatory opportunities and manage it accordingly. Hopefully that helps.
Operator: The next question is coming from Michael Ward of Citi.
Michael Ward: Maybe for Kamal, and I’m just a little bit curious about private credit. It seems like a pretty solid growth area across the industry, has been. Just wondering if you could remind us how you are participating in that, and if that could maybe bolster flows over the near term.
Kamal Bhatia: I think we started organically a private credit business inside Principal. We are quite proud of the investment results we have generated with that business over the past three years. And as you highlighted, it’s one of the high growth areas in asset management. I’ll give you a couple of observations on the marketplace today. One of the things we purposefully designed our expertise around was to be to the smaller and middle end of the direct lending space, which gives us an edge both in terms of generating long-term performance, but also it was less covered by the larger private credit players. As you’ve observed, the industry has grown bigger and bigger, and many of the large private credit operations are only operating at the large end of the marketplace, where I would observe there has been some reduction in pricing in terms of management fees, but also the quality of underwriting has become slightly less stringent.
And so, we remain focused on the smaller end where we find more alpha, but I’ll also observe that from our seat, we have become more risk aware also in that space. We are passing on more deals than we have historically because we want to make sure the deals we get into will generate the IRRs we expect. And this comes a little bit from our culture as Principal. Our legacy around high-yield credit has been to be much more smarter about risk management through a full market cycle and that’s our approach to private credit.
Michael Ward: Maybe for Deanna, I was just wondering on the Bermuda entity. I think that freed up like $200 million in the fourth quarter, last quarter. Assuming you’ve kind of used that for PRT a little bit, maybe some life in one key, I’m just curious if there’s any change. Should we think about that as maybe bolstering free cash generation, or is it just kind of supporting the profile as it stands?
Daniel Houston: Mike, I’m glad you asked the question because you’re on the verge of breaking a record of never having a question from the CFO. So I think Deanna is very enthusiastic about this response.
Deanna Strable: A couple of things there. As you remember from our last call, we really started that entity to really support new business, both on the term life side as well as PRT. It really is going to allow us to look at more growth opportunities for the same amount of capital usage. And so, if you actually just think about the first quarter, all of our new business for term was seeded over to the Bermuda entity. PRT is a little bit different in that we evaluate that on a case by case basis to understand whether that Bermuda entity is advantageous. And there actually wasn’t any of our first quarter sales that utilized Bermuda, but we’re still optimistic that we’ll continue to be a good move for us as we continue to grow those businesses, but doing it in a more capital-efficient way.
Operator: The next question is coming from Wes Carmichael of Autonomous Research.
Wes Carmichael: On variable investment income, it was softer in the quarter, which I think is probably to be expected with lower real estate transactions, but maybe not quite to the magnitude that it was. So just hoping you could maybe share your perspective in the next couple of quarters and what your expectations are there.
Deanna Strable: You’re correct. We did have some pressured variable investment income in the quarter. Actually, the drivers were a little bit different than what we have seen. If you look at it in total, it was a little bit lower than what we would have seen in the second half of the year, more similar to the first half of 2023, but some of the drivers were a little bit different. Again, we continue to see minimal prepays in the quarter. We also saw lower real estate activity in the quarter. But the real – the two bigger drivers of the underperformance in the current quarter, actually, the majority of that actually came in Principal International, which would be something that we wouldn’t anticipate repeating for the rest of the year.
where they do have within their general accounts some real estate funds, and we took a mark to market on that, which caused that $13 million of lower than expected variable investment income in the quarter. And then the other place where we did see positive returns, but lower than expected within our alts portfolio, and in particular, our private equity holdings. And so, as I look for the rest of the year, as I mentioned that PI IP [ph] should more normalize. We’ll likely continue to see pressured prepays, but again, we did lower our actual run rate expectations for prepays as we came into 2024, just understanding the interest rate environment as well as the specifics of our bond portfolio. But I think alts is the one that it’s just harder to predict, and we will expect some more quarterly volatility relative to that.
Just to size it a little bit, on alts, in the quarter we saw about a 5% to 6% annualized return and again our run rate is more in that 8% to 9% return and PE was even lower, but still positive than that 5% to 6%. Hope that helps.
