Principal Financial Group, Inc. (NASDAQ:PFG) Q3 2023 Earnings Call Transcript

Principal Financial Group, Inc. (NASDAQ:PFG) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Good morning and welcome to the Principal Financial Group Third Quarter 2023 Financial Results Conference Call. There will be a question-and-answer period after the speakers have completed their prepared remarks. [Operator Instructions] A confirmation tone will indicate your line is in the question queue. We would ask that you’d be respectful of others and limit your questions to one and a follow-up so we can get to everyone in the queue. 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 third quarter 2023 conference call. As always, materials related to today’s call are available on our website at investors.principal.com. Following a reading of a 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.

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Additionally, some of the comments made during this conference call may refer to non-GAAP financial 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. We’ll be hosting a combined fourth quarter 2023 earnings and 2024 outlook call on February 13th. We will share more details early on next year. Dan?

Dan Houston: Thanks, Humphrey and welcome to everyone on the call. This morning I’d like to share key aspects of our third quarter financial results and some notable performance highlights. Deanna will follow with additional details and an update on our current financial and capital position. Our diversified and increasingly integrated business model, as well as our leading and differentiated position in the US small to mid-sized business market contributed to a strong quarter. Across the enterprise we continue to balance investing for growth in our businesses with disciplined expense management. Starting on Slide 3, healthy sales growth across our businesses, and strong underwriting results drove reported non-GAAP operating earnings of $420 million or $1.72 per diluted share in the third quarter.

Excluding significant variances, earnings per share increased 14% over the third quarter of 2022. The synergies between our businesses increasingly integrated offering and the value of our distribution and joint venture partnerships continue to unlock value for our customers and shareholders. During the quarter, we delivered on our capital deployment strategy, investing for growth in our businesses and returning more than $350 million of capital to shareholders to share repurchases and common stock dividends. Our strong capital position enabled us to complete $200 million of share repurchases in the third quarter and to increase our dividend. After a strong start to the year, equity markets retreated in August and September. Foreign currency tailwinds in the first half of the year reversed in the third quarter, as the US dollar strengthened on growth and higher yields in the US, outpacing much of the rest of the world.

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Q&A Session

These macroeconomic dynamics impacted our total company managed AUM, which ended the quarter over $650 billion. Total company managed net cash flow improved from the second quarter, benefiting from strong net cash flow in Principal International, improved institutional flows in Principal global investors and strong general account flows. With $2.1 billion of net outflows in the quarter, we performed better than many active asset managers as a percentage of beginning AUM. The current volatile markets are a challenge for the asset management industry, and the aggressive interest rate hikes over the last 18 months have continued to make cash and money market funds highly attractive. This is evidenced by the nearly $1 trillion of industry flows into money market funds year-to-date, and approximately $7 trillion of AUM in money market funds across the industry.

We’re well positioned and have the right strategies as interest rates stabilize, and investors reallocate back into risk-based assets, like our specialty income solutions. Despite continued pressure in the real estate sector, we generated $800 million of positive real estate net cash flow in the quarter, as institutional investors are starting to put money to work and select real estate strategies. This was nearly double our real estate flows in the first half of the year, and demonstrates the confidence our clients have in our differentiated capabilities in this asset class. We have several real estate opportunities boosting our optimism for the coming quarters. We expect additional funding in the fourth quarter and our new data center fund and our China real estate joint venture.

As discussed last quarter, we have a strong pipeline of committed yet unfunded real estate mandates, currently over $6 billion that we’ll put to work opportunistically. Looking at asset management in total, we are aware of two large institutional outflows of similar size that will impact net cash flow by approximately $5 billion in total. One client is planning to take the funds in-house, while the others moving to a passive option. We expect one of the outflows to occur in the fourth quarter, and the other early in the first quarter of 2024. In Principal International, we ended the quarter with $168 billion of total reported AUM. This reflected strong retirement net cash flow in Latin America, including $1 billion in Brazil. Brasilprev, our joint venture with Banco do Brasil remains the market leader in both AUM and deposits with nearly 30% market share.

As a reminder, net cash flow in Brazil tends to be seasonally stronger in the first and third quarter each year. We continue to have great confidence in the global asset management opportunity and our ability to deliver global and local investment capabilities and client support across more than 80 markets. As part of our efforts to invest for growth, we have added two new highly regarded investment leaders, George Maris from Janus Henderson as CIO of Equities, and Michael Goosay from Goldman Sachs as CIO of Fixed Income. Both are proven investment leaders with specialized global expertise that complements our robust investment capabilities, and will further build upon our experienced team of nearly 900 investment professionals. We’ll also be announcing a new leader of Latin America in the coming days to drive our businesses across Brazil, Chile and Mexico.

Turning to US Retirement, account value net cash flow was positive in the third quarter. Total RIS sales grew 30% and fee-based transfer deposits increased 78% compared to a year ago, we had two large retirement plan sales in the quarter, which contributed $3 billion to sales and transfer deposits. As reminder, sales and lapses in large plan segment can impact net cash flow significantly quarter-to-quarter. Total recurring deposits increased over the third quarter of 2022, driven by a 7% increase in the SMB segment. This was partially offset by the impact on deposits from large plan lapses earlier this year, as well as lower defined benefit, plan deposits given the full funding status of these plans. The SMB segment continues to be strong and as proven resilient, as employment and wages remain healthy.

Looking ahead, we expect elevated lapses and negative net cash flow in the fourth quarter consistent with historical trends. We typically see plans change providers at year end. While we generally onboard new plans in the first quarter. On a full year basis, we expect sales and transfer deposits to be higher than 2022 levels, and we have good momentum heading into 2024. We remain focused on driving profitable growth in RIS, leveraging our leading market position and full suite of retirement and workplace solutions, in Specialty Benefits strong sales, retention, employment and wage growth contributed to an 8% growth in premium and fees over the third quarter of 2022. Attractive segments within the SMB market remain underpenetrated. And we are confident in our ability to target these segments with a meaningful value proposition to aid and continuing to deliver above market growth.

In Life, our strategy is working as a business market premium and fees grew 24% over the third quarter of 2022 and outpace the run off of the legacy business. I’m excited about the growth opportunities across the enterprise and confident that our focus on high growth markets combined with our integrated product suite, and distinct set of distribution partnerships will continue to drive value for our customers and our shareholders. At our core, we’re focused on providing individuals, businesses, communities and markets with access to financial tools and products and guidance. And today, we know the demand for this kind of knowledge and support is significant. To stay in touch with customer trends around the globe, we regularly take a step back and consider the state of the foundation upon which our industry is built.