Deanna Strable: Yeah. I’ll just step back a little bit, Suneet, and talk about the purpose for that entity. Again, we constantly evaluate opportunities to create value for our customers and our shareholders that led to us setting up the entity and that was — we did receive approval in the fourth quarter. The ultimate focus of that is to support our PRT and our term life insurance business with the ultimate focus on new sales. But to kind of start the company, we did feed some in-force business to that, both on the PRT and the Life side, and that cause — that did benefit us about $200 million in our free capital flow in the fourth quarter. For 2024, we’ll, again, be much more focused on using this, as Chris mentioned already, for new sales, providing us capital flexibility, allowing us to take advantage of growth at more capital efficient levels, and ultimately, we’ll assess if there’s other uses there, but our focus is on that new sale other than what was needed to feed the company.
Suneet Kamath: Okay. That’s helpful. And then I guess shifting to RIS fee, so one of the things that we’re hearing from, I guess, one of your peers is that, as participants reach retirement age, they’re actually starting to take money out and put it into products that have higher yields, I’m assuming it’s rollover into fixed annuities or fixed indexed annuities. So can you — I know you give us the lapses and withdrawals on a consolidated basis, can you just give us some color on what you’re seeing at kind of the participant level? Are you seeing a pickup in withdrawals and maybe how current trends compare to recent years?
Dan Houston: Go ahead, Chris.
Chris Littlefield: Yeah. Thanks for the question. Yeah. I would say that we saw in 2023 a modest increase in participant withdrawals primarily due to overall retirements than due to either loans or withdrawals. And so we are seeing a modest increase in the withdrawal rates there on the participants. But that being said, again, when you look at the participants, we’re also seeing really healthy underlying fundamentals. We’re seeing deferrals are up significantly over 8%. Matches by employers are up. So we’re seeing a lot of things that are feeding overall growing, the recurring and the account value growth, but we definitely are seeing an increase in some retirements — a modest increase in retirements.
Dan Houston: I mean, one thing to sort of note about these deposits for those people who oftentimes keep their money inside the existing 401(k) plans, it’s because think about those as being institutionally priced. They like those investment options. So leaving money in the plan is clearly one of those options. For those that want to distance themselves from an employer, they can still obtain a rollover IRA with Principal, and again, that’s a very active part of our strategy. But we also have to remember that there’s a lot of people that are literally drawing down their 401(k) account balances of retirement to live off of and that’s the business that we’re in, and we’re fortunate also to be able to have competitive annuity income options for these individuals.
So we’re not surprised, but at the same time, there’s a lot of effort that goes into retaining these assets because, again, we believe we have great solutions for those individuals. But appreciate the question.
Suneet Kamath: Thanks.
Operator: Our next question is from John Barnidge with Piper Sandler. Please proceed with your question.
John Barnidge: Good morning. Thank you very much for the opportunity. My question is around the severance. Was there a lens towards looking at more greatly unified operations of PI and Principal global investors now that we’re further into the shared umbrella of Principal Asset Management?
Patrick Halter: Yeah. The reality is, we always align our expenses with our revenues and this severance is really spread across the organization in its totality. There’s not a lot of fanfare around that, but it’s making sure that we’re just aligning expenses accordingly. So there isn’t any one spot and it’s all Principal’s ongoing efforts to manage these expenses, and, again, that’s no different than what we’ve done previously, John. So hopefully that helps.
John Barnidge: It does. Thank you very much. And my follow-up question, lots of companies have been calling out the opportunity for supplemental voluntary products as a growth vertical. Can you maybe talk about the opportunities set for your company, as well as general product development pipeline for benefits?
Amy Friedrich: Yeah. I’ll throw that over to Amy in just a second. I was actually looking back at our Principal Well-Being Index that was done back in November, and, again, it was ironic. The SMBs actually have a 65% favorable outlook from a financial perspective, 73% feel it’s getting better from here and they also cite specifically benefits as a way to attract and retain talent. So, again, it’s a very favorable environment for SMBs, and of course, Amy is one of our best subject matter experts on this. Amy?
Amy Friedrich: Yeah. Thanks for the question, and, Dan, you’ve got it right. There’s a — there is an appetite for these products. There’s a need for them. What I would say is, most people see the use of these supplemental products not as a replacement for some of the core coverages they’re putting in place. So we’re still seeing a high interest in getting core income replacement products done. Small- and mid-sized businesses are still taking care of their major medical needs. But we’re adding on these critical illness, the accidents, the hospital indemnity to help cover the things that aren’t covered by some of the other pieces of insurance. So when you look at like a high deductible plan that you’d have to get up to $7,500 before the plan would kick in to help pay, it’s helping meet some of those expenses.
So what I would say is, these products in our portfolio make a ton of sense and you’ve seen us add critical illness, you’ve seen us add accidents and you’ve seen us add most recently hospital indemnity. That’s giving us the ability to have a worksite portfolio that helps complement the things that they’re doing. We’re expecting and are seeing growth in excess of 15%, up to 20% on those product sets. Now our base on those sets is pretty small, but it’s responsive to the marketplace. The last point I would offer is, those are also giving us the ability with the type of financial security in place that if people have those benefits in place, they’re better able to participate in some of the other programs like saving in a 401(k) or investing in the places that make sense for them as an investor.
So that if you’ve got these products in place, then our ability to extend to other pieces of Principal’s great product set is even higher.
John Barnidge: Thank you.
Dan Houston: Thanks, John. Thanks for a good question.
Operator: Our next question is from Tom Gallagher with Evercore ISI. Please proceed with your question.
Tom Gallagher: Good morning. Let’s see, a couple of questions. First is just on alternative returns. I think you’re assuming in line with your long-term expectation, but then there was a footnote just saying, if current conditions persist in real estate in particular, you would — I guess, potentially you’re going to come in below that. Can you just sort of clarify what you’re thinking on that? Do you — would you expect alternatives to be softer in 1Q or 2Q based on what you’re seeing today?
Dan Houston: This is where you wish you had a great crystal ball, which we don’t. Deanna, you want to provide some additional color?
Deanna Strable: Yeah. Tom, thanks for the question there. The first thing I would reiterate is our ranges that we’ve put out there for margin and revenue growth are all on an ex-significant variant basis, and obviously, the last few years, variable investment income has been one that we have called out as it has run below our actual level. Just to put that in a little bit of perspective, our run rate return for our alt portfolio is in that 8% to 8.5% range and we actually came in in 2023 more in that 6% to 7% level, and we did provide on the slide deck an actual breakdown of our alternative portfolio, which is about a $5 — a little over a $5 billion portfolio. So given kind of the difficulty in actually predicting that, we felt it was prudent to give you guidance on a run rate basis.
And also because we actually see a path to getting to that run rate basis either late in 2024 as we think about 2025, and I know you’re aware, but our alt portfolio is more weighed or heavily concentrated in real estate and has less allocation to private equity and hedge funds. If we think of 2023, we actually — the places where we fell below our expectations was pre-pays, not surprising given the interest rate environments and the elements of our bond portfolio and also real estate, which again, more of ours comes from real estate transactions and 2023 was obviously not at time to actually take advantage of that. Our alt portfolio — our private equity and hedge actually performed better than we expected, and again, helped to offset some of the impact that we saw there.
So one of the things that, again, it’s probably easier to think about the next quarter or two than it is the full year, pre-pays in real estate transactions will probably run below our expectations, but it’s interesting if we actually did have BII be at the same level that we experienced in 2023, our reported EPS would actually be in that 9% to 12% growth rate as well as our adjusted and our outlook. So hopefully that gives you a little bit more color.
