Principal Financial Group, Inc. (NASDAQ:PFG) Q4 2022 Earnings Call Transcript

Alex Scott: Hi, good morning. My first question is on the net investment income and just overall sort of sensitivity to interest rates. I know, you all disclosed some sensitivities and, it’s fairly low, but there’s sort of two components to that, sort of the lost earnings from AUM declining when rates go up. But then also the benefits that you’d get in net investment income and the two things, the timing may not always match up and it struck me as a pretty strong quarter from a net investment income standpoint. So, I just want to understand like how we can expect that to unfold from here? What are the underlying elements within fee and retire €“ in the spread business in retirement that are benefiting from rates and to what degree should that continue as rates remain elevated?

Dan Houston: Thanks, Alex. Deanna?

Deanna Strable: Yes, I’ll make some comments and then see if Chris has anything to add relative to RIS on lines of business. So first of all, I think it is important to understand that that sensitivity that we give is a trailing 12-month basis that kind of assumes the interest rate happens kind of at the beginning. We see very obviously negative pressure on our fixed income values that impacts our revenue in both RIS and PGI. And you kind of see that continue and then as you start to invest some new money, see some cash yields go up, you’ll see that the benefits start to offset that to then get to a pretty muted overall impact in the trailing 12 months. And so again, you did see that transpire in the fourth quarter. I do think it’s important when you look at our total company net investment income and compare it to last quarter, there’s kind of two dynamics I want to point out.

One dynamic is obviously variable investment income was not as negative in the fourth quarter as it was in the third quarter. And then you also, because of equity method accounting for our Brazil joint venture, the strong earnings that we saw in Brazil partially due to inflation, it’s flowing through that line of business as well. So you need to kind of take that part out. And then what you’re getting to is, you are starting to see some impact from the higher interest rates. You’ll see that our new money that we’re investing in is earning a higher rate. We’re also because of increase in treasury rates, you’re going to see that what we’re earning on cash, what we’re earning on escrow and PGI is seeing some benefits from that. I do think it’s important to point out, especially in RIS, is that some of that increase you see in that investment income then gets credited back out to our customers in our BC&S line.

And so it doesn’t fall to the bottom line as you think about that, But specifically to the bank and trust business in RIS, I think those are the businesses that are benefiting from those higher levels of interest rates. But I’ll see if Chris has anything to add there.