Q3 2019 Earnings Call
Good morning, and welcome to the principal financial Group third quarter 2019 financial results Conference call. There will be a questionnaire to period. After the speakers have completed their prepared remarks, if he would like to ask a question at that time, so people have Saar and the number one on your telephone keypad.
I would ask that you'd be respectful of others that limit your questions to one and a follow up so that we can get to everyone. In the queue I would now like to turn the conference over to John Egan, Vice President of Investor Relations.
Thank you and good morning, welcome to principal financial group's third quarter conference call as always materials related to todays call are available on our website, a principal dotcom backslash investor.
As a reminder of the acquisition of the Wells Fargo, institutional retirement and trust business or IR team.
It was at the beginning of the third quarter and the financials are reported in our yes fee.
We are continuing to evaluate options for the best long term financial reporting structure. Once the business is fully integrated following a reading of the safe Harbor provision CEO , Dan how soon and CFO Deanna Strable well deliver some prepared remarks, then we will open up the call for questions.
As available for the QNX session include Rene shop retirement income solutions, Tim Dunbar Global asset management, Luis Valdes principal International and Amy Frederick U.S. insurance solutions.
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.
Risk and uncertainties that could cause actual results to differ materially from those expressed or implied or discuss some of the company's most recent annual report on Form 10-K , and the quarterly report on Form 10-Q .
Filed by the company with the U.S. Securities and Exchange Commission.
Additionally, some of the comments made during this conference call may refer to non-GAAP measures reconciliation of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measure may be found in our earnings release financial supplement and slide presentation.
And one other item. Please plan to join US for 2020 outlook call on Wednesday December 11th well discuss business unit expectations for 2020 and provide any needed updates to long term guidance damn thing.
Thanks, John and welcome to everyone on the call. This morning, I'll share performance highlights and accomplishments that position us for continued growth Deanna will follow with details on our financial results in capital deployment.
The third quarter, we reported $345 million, a non-GAAP operating earnings excluding significant variances, which deanna will discuss non-GAAP operating earnings decreased 10% compared to a strong year ago corridor.
For the trailing 12 months' also excluding significant variances non-GAAP operating earnings of $1.5 billion were 5% lower than the year ago period. The decline reflects macroeconomic headwinds ongoing pressure P.G.I. and Oreo speed and increased investments in the business as I reflect on our performance in progress.
Over the first nine months beer, we continue to demonstrate strong business fundamentals balance investments in our business with expense discipline and be good stewards of shareholder capital.
We also continue to execute our customer focused solutions oriented strategy as we expanded our global distribution network and re of retirement investment and protection solutions.
And advance our digital business strategies to create a better customer experience and drive revenue growth, while gaining operational efficiencies.
Compared to year ago, and excluding the acquired assets under administration Ray you wait total company reported assets under management Ray you Whim increased $36 billion were 5% to a record $703 billion.
Year to date, you Amazon $77 billion or 12%.
As a reminder, AIU women are trying to joint venture of $146 billion at quarter end isn't included in our reported a you win.
Excluding the impact of foreign currency exchange, China, U.M. is up 2% compared to year ago on a total company basis, we generated $6.9 billion of net cash phone third quarter.
Our strongest result in three years. This includes positive net cash flow and all of our businesses.
All right, yes deliver $2.8 billion net cash flow its seventh consecutive positive quarter. This was driven by strong sales retention and recurring deposit growth and our I ask fee and record pension risk transfer sales and Orion spread.
Over the trailing 12 month, our yes has delivered over $9 billion a positive net cash flow.
Almost double the net cash flow in the same period a year ago.
Principal international generated $1.6 billion of net cash flow, it's 44th consecutive positive quarter. This primarily reflects strong flows in Brazil, where we're leading the industry a net deposits captured year to date. It also reflects record net cash one Hong Kong has increased collaboration between principal international and principal.
Global investors drove a large platform win during the quarter.
This collaboration is increasingly beneficial is private pension reform discussions advanced around the world and government to recognize not only the importance of voluntary savings, but also the benefit of using asset managers to improve long term returns.
Moving to PGS <unk> third quarter PGTI managed net cash flow was a positive $2.9 billion. The strength in this measure was broad based with institutional are fun platforms and the general account all delivering positive net cash flow.
Hi, guys source net cash flow was a positive $1.3 billion compared to a negative $3.7 billion in the prior year quarter. This is Pete you guys best quarter source net cash flow in two years.
On a trailing 12 month basis sourced deposits are up more than $3 billion or 9% well withdrawals have stabilized as a percentage of the average or you will.
Slide five highlights the ongoing strength of our investment performance at the end of the third quarter for our Morningstar rated funds, 81% of the fund level at U.M. had a four or five star rating.
75, and 78% of our principal actively managed mutual funds EPS separate accounts and collective investment Trust were above median for the three and five year performance respectively.
91% were above median for 10 year performance was 63% in the top quartile for one of your performance 49% were above median this is primarily due to the underperformance in the fourth quarter 2018 of certain international equity strategies, which also impacts our target date series these strategies.
Have improved year to date, we continue to make good progress to drive sales growth and improved retention, particularly areas of distribution and product development in the third quarter, we launched more than a dozen new investment strategies across our you asked an international platforms of particular note. We continued to expand our suite of multifactor EPS MPG.
Well these investments are available to the general marketplace. They were designed to give financial advisors more flexibility to allocate assets through robust wells digital platform. We had several key launches internationally as well, including the U.S. Blue Chip equity fund on our usage platform. The first Chilean mutual fund investing.
In the real estate sector and lastly, the principal philanthropies, social impact Bond fund the first of its pipe in Indonesia.
Additionally, we continue to refine our investment capability structured PGTI.
As client demand for emerging market fixed income strategies continue to grow we're bringing together cohesive emerging market debt team by combining the finished her leadership with other PGTI talent. This will enable us to provide a full suite of emerging market debt solutions to meet client needs.
While we closed a hedge fund and finished here during the quarter and took an impairment we expect a strong growth we've seen another fenster solutions to continue.
Our solutions and capabilities continue to resonate in the marketplace as shown by our ongoing success, adding our investment options to third party distribution platforms recommended list and model portfolios over.
Over the trailing 12 months, we've earned more than 100 total placements, but more than 50 different investment strategies on more than three dozen different platforms.
Now I'll provide more highlights on our business execution, starting with the IR T. acquisition that closed on July Onest. Some details are provided on slide six.
It's early in the process, but the integration is on track revenue lapses are inline with expectations. Prior to close we announced plans to unify the our I asked leadership team by bringing onboard top talent from IR team.
These leaders bring a significant amount of acquisition integration experience with them as they have integrated a dozen acquisitions over the past 20 years together, we have the expertise and the resources needed to ensure a smooth transition while continuing to deliver organic growth in the business.
We're extremely pleased with a large number of positive interactions weve already had with clients advisors and consultants as expected we're already seeing a few benefits the acquisition and significant scaling capabilities to our mid and large plan presence. It strengthens our presence in key industries, including healthcare manufacturing and financial service.
And it amplifies our leadership position across defined contribution defined benefit nonqualified deferred compensation and trust in custody in terms of technology platform. We determined we would best for retirement customers by incorporating capabilities from the IR to platform into principles proprietary record keeping platform similar.
We best served the trusting capacity customers by retaining Sci IR team existing trust accounting platform.
Work is on track to integrate and enhance the infrastructure to ensure a smooth transition in combination with our top tier service model and our accelerated investment in digital capabilities, we're delivering better outcomes and better experience for plan participants and plan sponsors as well as for consultants and advisors. One example is our new digital mode.
We'll participant on boarding platform principal real start since the fourth quarter 2018 launch we've seen 250000 participants complete the experience their averaged deferral rate is just under 8% nearly 50% higher than traditional.
Additionally, 28% of these participants are saving at least 10% of their income and 23% or Ottawa escalating to 10% both are more than six times the rate of other enrollment methods. This helps drive recurring deposit growth, but more importantly, it puts participants on the path to having enough income.
And retirement.
Another highlight we're proud of and US insurance solutions. We're one of the first in the industry to debut a fully digital experience for purchasing term life insurance more than 95% of the users now apply online with no assistance and approximately 25% completed on a mobile device. This new end to end digital process.
As delivers a policy two thirds faster on average in many cases, we can have a policy in the clients hands and a few days and in some cases, just a few hours after issue.
We've also updated the principal benefit design tool, which captures the knowledge weve gained from working with over 140000 us business owners on building competitive benefits packages, including retirement dental disability income and life insurance advisers and business owners concrete personalize reports on how benefits.
Compared based on size industry and region.
Finally, I'll share some development outside the US then also demonstrates our focus on delivering a better customer experience.
In Mexico, we launched a partnership with club premiere the most recognized coalition program in the country to offer loyalty rewards to promote savings and in Hong Kong, We launched a digital onboarding tool for MPF members, Dan will cover capital in more detail, but all again emphasize our balanced approach to deployment. In addition to ongoing investment inorganic.
Growth through nine months, we've deployed more than $1.8 billion of capital and total with $1.2 billion for the Iraqi acquisition and $627 million return to shareholders through common stock dividends and share buybacks.
This includes resuming share buy backs in the third quarter with $44 million of repurchases. We enjoyed some noteworthy third party recognition during the third quarter and our global asset management franchise. We won multiple Best Fund Awards in Chile, Malaysia, Thailand principal asset management for Hod was named investors choice Funhouse of the year.
2019 by FSM, one, Malaysia, and principal real estate investors around industry recognition for leadership and sustainability and responsible property investing. Additionally, U.S. news and we'll report named principle to the list a best life insurance companies of 2019, and Ibis associates rank principle, the number one provider of.
Life insurance and the small case business market based on case count in premium.
The investment management Education Alliance recognize principle with five education awards more than any other from including awards for digital Education and retirement Communications Lastly, principal Chile and go from both were recognized by Diorio financiero for their commitment to ethical business and integrity.
Along with recognition in the first half of the year for our commitment to diversity inclusion and ethical behavior. The recognition speaks volumes about our culture.
During the third quarter, we made clear progress in helping customers and clients a chief financial security and success, we continue to take the appropriate steps to combat competitive pressures to differentiate principle in the marketplace and position the company to deliver above market growth and shareholder value over the long term before turning the call over to Deanna I want to let you know.
That were closely following events in certain locations in Latin America in Asia, where principal does business, we're taking the necessary steps to help ensure the safety of our employees, while continuing to meet the needs of our customers Deanna.
Yes, Dan good morning, and thank you for participating on our call today I'll discuss the key contributors to our third quarter financial results, including impacts of the actuarial assumption review and provide an update on capital deployment as well as our strong financial position.
Net income attributable to principal was $277 million for the third quarter, including minimal credit losses, and a 74 million dollar impairment of an equity method investment.
The impairment was driven by the closure of a hedge fund infinera stare as Dan discussed earlier.
Additionally, fenice there will be fully consolidated in our financials, starting in the fourth quarter.
Reported non-GAAP operating earnings were $345 million or $1.23 per diluted share.
As shown on slide seven we had three significant variances during third quarter with a net negative 41 million dollar impact to reported non-GAAP pre tax operating earnings.
The significant variances included a negative 40 million dollar impact as a result of the annual assumption review, partially due to lowering our interest rate assumptions.
$11 million of elevated compensation and other expenses stemming from the IR T. acquisition.
Including $7 million of transaction cost incorporate and $4 million of integration cost and RSP.
And a 9 million dollar net benefit and principal international with $13 million of higher than expected and hey performance, partially offset by $4 million of lower than expected inflation, both in Latin America.
As a reminder, in a year ago corridor, we had three significant variances within net positive 65 million dollar impact to reported non-GAAP pre tax operating earnings.
This included the annual assumption review and accelerated PGTI real estate performance fee and higher than expected variable investment income.
This year the assumption review was impacted by economic and experience assumption changes as well as model refinements.
For economic adjustments the most significant impact was an individual life from lowering our interest rate assumption.
This included a 50 basis point decrease to the assumed long term 10 year treasury rate lowering it to 4%.
In addition, the starting point has dropped significantly from this time last year and we extended the length of time until we get to the ultimate rate.
The 10 year Treasury as one of many assumptions for investment income over the life of the business.
Experience assumption changes included updates and RSV and individual life RSV had the biggest impact as we updated withdrawal assumptions in variable annuities.
These items were partially offset by a benefit from model refinements in specialty benefits and principal international.
The most significant wasn't specialty benefits, where we updated our models to capitalize acquisition costs in our group benefits business.
This will not have a significant impact to annual pre tax operating earnings, but will slightly impact the quarterly pattern of earnings.
Looking forward. We expect these changes will decrease pretax operating earnings and individual life by $2 million to $3 million per quarter and have an immaterial impact and the other business unit.
Well not a significant variances quarter variable investment income was slightly below our expectations on a total company basis.
Slightly higher prepayment fees and in line real estate returns were offset by lower than expected alternative income.
Variable investment income was $9 million lower and our highest spreads as it has a greater allocation of investment income from alternative.
This is primarily offset by a slight positive and individual life and specialty benefits, which benefited from higher prepayment fees.
Our OE, excluding AOCI I other than foreign currency translation adjustment was 12.4% on a reported basis.
Excluding the impact from the assumption review, our OE was 12.7%.
The non-GAAP operating earnings effective tax rate was 17.7% for the third quarter slightly higher than what we experienced in the first half of the year.
We continue to expect the full year to be within our guided range of 16% to 20%.
Looking at macroeconomic factors, the S&P 500 index increase over 1% during the quarter and the daily average increase nearly 3% compared to second quarter.
On a trailing 12 month basis, the daily average increased 3% significantly less than a 16% increase in the prior period and I assume equity market performance impacting revenue growth and RSV MPG.
Foreign currency exchange rates were a headwind for principal international on third quarter.
Pre tax operating earnings impacts were a negative $4 million versus the prior year quarter, a negative $2 million compared to second quarter, 2019, and a negative $29 million on a trailing 12 month basis.
Mortality and morbidity were within our expectations in individual life and specialty benefits for third quarter.
All right spread mortality losses were $12 million worse than expected.
Third quarter typically has a mortality last but not to this magnitude.
We're comfortable with our experience over the long term.
Turning back to slide six all expand on Dan's comments on the IR T. acquisition.
As a reminder, we're operating under a transition service agreement for up to 24 months to give us time to build out additional infrastructure to ensure a seamless transition.
As the acquisition closed on July 1st. This is the first time, we are reporting the financials, which are included in our ASP.
The results are largely in line with what we communicated at the acquisition announcement, but we did want to highlight a couple of items.
At the end of the third quarter, the acquired business had $876 billion of Eylea growth in a way since the acquisition announcement has been driven by positive equity market performance.
Keep in mind that anyway is not a direct driver of revenue or earnings.
These and other revenues and the trust in custody business are correlated with movements and the interest on excess reserves rate our I O. We are.
This rate has been lower three times since the announcement of the acquisition and additional federal reserve rate cuts are being considered in fourth quarter. This has negatively impacted revenue in this portion of the business.
I close we recorded $546 million of intangible assets from the acquisition, resulting in $7 million of additional amortization expense and RSV each quarter. This negatively impacts the operating margin, but does not impact free cash flow.
Excluding transaction and integration costs, the acquisition had an immaterial impact on third quarter non-GAAP operating earnings per diluted share as we expected.
Going forward. It is anticipated to have an immaterial impact for full year 2019.
Will provide updated expectations for 2020 on our outlook call.
The integration is on track as Dan said and I'm confident that we have the right team in place to ensure a successful transition.
Following comments on business unit results excludes significant variances from both periods, including the assumption reviews.
Starting with RSV on slide nine pretax operating earnings of $124 million were inline with expectations and includes the immaterial impact of the IR T. acquisition trailing 12 months' net revenue growth of 3% is above our guided range as the acquisition brought on additional net revenue and third quarter.
Excluding the impact of the acquisition fees quarterly margin was just over 30% and slightly above the guided range.
Including the acquisition the quarterly margin declined from 33% in second quarter, 225% in the third quarter.
Longer term, we expect quarterly margins took span once the acquisition is fully integrated and the expense synergies are realized.
Importantly, the underlying fundamentals in the legacy business continued to be strong.
Compared to a year ago sales of $3.7 billion in the third quarter increased nearly 30%.
Defined contribution plan count was 2% higher.
Net cash flow of $1.1 billion was driven by strong sales, 10% growth in recurring deposits and low contract lapses.
We expect full year net cash flow to be at the high end of the 1% to 3% of beginning of year account values.
Turning to slide 10 are as spreads pre tax operating earnings of $83 million were lower than expected due to $12 million of worse than expected mortality losses, and $9 million of lower than expected variable investment income as I mentioned earlier.
All right spreads trailing 12 month net revenue growth and margin were within our guided ranges.
Our highest spread sales of $3.1 billion in third quarter included a record $1.3 billion of pension risk transfer sales.
This brings pension risk transfer sales to $2.8 billion year to date more than all of 2018 sales.
As shown on slide 11, PG eyes pretax operating earnings of $123 million were in line with expectations.
On a trailing 12 month basis pizza guys margin of 35% was within our guided range.
Revenue growth remain below our guided range, primarily due to unfavorable equity market performance in the fourth quarter of 2018.
Moving to slide 12, principal International's pretax operating earnings of $92 million with slightly higher than expected due to timing of prepayment fees in Chile.
Hi, guys trailing 12 month margin of 38% was within our guided range, but net revenue growth was lower than our guided range due to foreign currency headwinds.
Excluding these headwinds net revenue increased 6% over the prior year period, turning to slide 13 specialty benefits pre tax operating earnings of $81 million were strong due to favorable claims experience and growth in the business.
Strong performance continued and specialty benefits was 7% growth in premium and fees on a trailing 12 month basis.
This was driven by strong sales retention and group growth and was within our guided range. The trailing 12 month margin of 13% was also within our guided range.
As shown on slide 14 individual lifes pretax operating earnings of $52 million were inline with expectations, but lower than the prior year quarter as claims experience returned to expected levels.
On a trailing 12 month basis individual life premium MP growth and margin were within our guided ranges individual life sales increased nearly 30% from year ago with over 60% from the business market.
At $95 million corporate pre tax operating losses were higher than expected as discussed on previous calls higher security benefit expenses as well as increased debt expense and lower net investment income related to the IR T. acquisition are impacting corporate losses.
We continue to expect corporate losses to be above the guided range of $300 million to $320 million for the full year.
With the recent drop in interest rates I want to provide some details on impacts to our businesses outside of the assumption review during the third quarter at 3.2%, our new money yield was about 60 basis points lower than the overall portfolio yield excluding variable investment income.
However, it will take some time for the new money yield to have a meaningful impact on the overall portfolio yield.
And while low rates are an ideal for some of our businesses the level of spread compression won't be as pronounced as in previous periods. When the portfolio yield was much higher than the new money yield.
As I mentioned earlier, the IR tea business will impact our sensitivity to interest rates and we plan to provide an update on our 2020 outlook call.
We remain disciplined and updating our pricing for interest rate movements were conservative in the products and liabilities, we have exposure to and we remain diligent around asset liability management.
While higher rates are incrementally positive our diverse business mix positions us well in this low interest rate environment.
As shown on slide 15, we committed and deployed over $200 million of capital during the quarter, including a $153 million deployed for common stock dividends $44 million and share repurchases and $5 million to a minority investment.
With capital deployment of $1.8 million through the third quarter of 19, we've already exceeded our window 1.4 billion dollar guided range for 2019.
Last night, we announced a 55 cent common stock dividend payable in the fourth quarter, a 2% increase from a year ago.
Our dividend yield is approximately 4% and on a trailing 12 month basis were slightly above our targeted 40% net income payout ratio our capital and liquidity position remained very strong we ended the third quarter with nearly $1 billion at the holding company a $100 million of capital in excess of a 400% RBC ratio.
And over $400 million of available cash in our subsidiaries. In addition, a low leverage ratio and no debt maturities until 2022 provides us significant financial flexibility.
Looking ahead I want to remind you that fourth quarter operating expenses are typically higher than other quarters as we usually see elevated branding expenses benefit cost and variable sales expenses.
We look forward to talking with you on our 2020 outlook call on December 11 will provide updated expectations for each business unit for 2020 as well as any updates to long term guidance. These will reflect the impact of the IR T. acquisition. This concludes our prepared remarks operator, please open the call for questions.
At this time I would like to remind everyone that to ask a question to press star and the number one on your telephone keypad, we'll pause for just a moment to compiled acuity roster.
The first question will come from Ryan Krueger with KBW. Please go ahead.
Hi, Thanks, good morning.
I know you said you plan and plan to update us on the 2020 out of the kobe's or is there any additional info you can give us understand better the the potential sensitivity of the wells business to short term rates, maybe that the balance of trust and custody assets or something of that nature that could help us frame it.
Yes. Thanks, Ryan This is Dan it's a good question then as we all know this trust in custody business.
Quite different than what our considers the traditional full service model in the and the and the reality is that the short term interest rates do matter and it's not insignificant, but with that I'll ever Nay provide you with any sort of thought she might have on sensitivities going forward. If there is another downtick in short term interest rates, yes. Thank you for your question Ryan.
And as Dan pointed out.
The mix of business that we are getting from IR team is a little bit different from what you might think about in terms of our traditional fee business and there is a spread component.
To the trust in custody business.
Generally speaking if you were to isolate the IR TV revenues.
We see about 10% to 15% of the revenues as having an impact on the fed rate that is established for the.
Interest on excess reserves.
And as we go into the earnings.
Outlook call in December we can give you a greater detail about how you might think about that for the future, but hopefully that gives you somewhat of a frame for this call today.
Thank you and then follow that somewhat related to $7 million of quarterly intangible amortization will that continue for the foreseeable future to that.
Overtime.
It will continue for the foreseeable future that is something that you can expect to see quarter over quarter.
The actual amount may vary according to the way that the assets are.
Amortized, but it is a.
Thank you. This you can expect to see their quarter after quarter, Ryan just to add on that the large portion of the intangibles are amortized over a 23 year period with a smaller portion amortized over six years.
So again over the next six years that amortization amount will stay the same.
Thanks for the questions Ryan.
Thank you.
The next question is from Tom Gallagher with Evercore ISI. Please go ahead.
Good morning the.
Yes, say that you have with wells Deanna that you said is 24 month contract.
What are those expenses can you can you quantify how much that is and what should we expect to get.
Kind of a cliff pop and earnings when that's done or are there are pieces to that so it's going to be more gradual.
A question and I appreciate it Rene you want to go and cover those details absolutely. So Tom when we think about the transition service agreement and the expenses that are attached to that.
That represents the direct cost that we are being assessed from wells Fargo Irit.
To service this business and so as the business and employees transition from IR t. onto the principle, we can expect that the Ts say.
Will decline in amount, but then commensurately, you'll see an increasing the amount of the expenses that we take on with the principal block and so it's it's somewhat of a just a transition of expenses over time.
But I think that it's also true to say that over a longer period of time as we weaning ourselves off this system we will.
See a material reduction in cost because of many of the synergies that we've discussed in getting to this point, but those will not materialize I think the word you used Tom was like a cliff and 24 months it'll take some period of time to have that materialized.
Gotcha and then just just a question about the retention of the wells business so far.
I looked at the year end.
Disclosure at 2018, and then the updated three Q I was sort of backing into about outflows of 10% of the book. So I guess my question is is that Directionally about what's happened thus far.
Can you comment on how the retention as compared to your expectations. So let me hit that first I'll toss it to rename the first and foremost is we were 100 days into this transition.
And we frankly couldn't be more excited about the feedback we're getting from a number of different constituents starting with employees that were previously with wells Fargo. They're excited about joining a retirement asset management organization.
The second is we have hosted many many clients of all sizes and the feedback has been quite positive.
The third constituency is obviously the advisers consultants to gatekeepers investment.
Advisers to these plans and again many of those are or individuals and organizations. We haven't previously worked with closely and I think they had been pleasantly surprised not only by the strategy that we're using to transition to business, but equally important some of the capabilities that they currently don't enjoy today that they will enjoy.
Once we transition the plans over so with that I'll ask.
Rene this speaks maybe specifically to the 10% number absolutely. So I think maybe what you're doing is looking at the assets under administration number and maybe trying to use that as a proxy for how to think about the.
The lapses that we're seeing in revenue, where they decline that we would anticipate seeing revenue due to lapses. The one thing I would caution you about there is that assets under administration figure has a lot.
A different kind of a mix represented in there. So it's not a very good proxy for revenue.
So for example that assets under administration figure has.
Very large portion of it attributable to the nine.
Retirement trust in custody business and it will not perform similarly to what we might expect to see for defined contribution defined benefit nonqualified business underneath the block.
So I think that's that's the first thing I want you to now with respect to the lapse rates as Dan said. This is running as we had anticipated we're not seeing anything that is surprising or concerning at this point and we have been really well received in the marketplace.
We are going above and beyond to make sure that we continue to communicate fully with clients with financial advisors and consultants.
And to that we approach this transition process.
Absolutely and with a great deal of detail so that we can ensure.
A very smooth transition and that we can add value to their long term business.
Thanks, Tom for the question.
Thanks.
The next question is from Jimmy Bueller with JP Morgan. Please go ahead.
Jimmy.
Hi, there I had to mute on okay.
Just a question on BG you had pretty strong flows this.
This quarter, but they've been sort of inconsistent so.
What really drove that or was it a few large cases that you one or was it more broad based and what your expectations are for flaws.
Over the next few quarters.
Yeah, we're really excited about the net cash flow improving and Pat Tim just on a great job getting out and Theres a lot of variables and lot of exciting news, there, but I'll throw to Tim to to provide some of those details yet thanks, a lot for the question.
No. What we're seeing is really a broad based centrists and a lot of our capabilities and I would say impart the low interest rate environment has seen a lot of our clients and a lot of our platforms. When on the fixed income side. So that would be core fixed income, but also preferred securities.
Any emerging market debt that we have a new total return on with Fenix stare. So we've seen a good pickup there, but as well we've seen really good pickup in a lot of the platforms than many of our equity capabilities like Blue chip.
And some of our small cap, both domestic and international capabilities, and then really systematic strategies is doing well in a lot of our asset allocation capabilities. So it's really quite broad based I would say.
Just like Dan said pad halter and the team the distribution team have done an excellent job of creating an organizational structure that is really cohesively going after the marketplace and so we're seeing a lot of momentum build so we feel good about fourth quarter.
Nobody knows what the macro environment as but I think we feel good about the organizational structure, we have and moving into 2020.
And just fees on the assets that you put on recently are those commensurate with like overalls, either because in the past there have been instances when you've had pretty good flows and then.
A few years later, if you find out that a lot of those cases that came on.
Lower fees.
Especially the Japanese mandates any comments on.
Oh, the recent improvement inflows relates to fees on those assets.
No I would say I would say, we havent had any of the very large investment grade fixed income mandates come in the door this quarter like what maybe you'd seen in the past and so now the fee levels that were seeing are really pretty good and pretty consistent I'd also mentioned that in our real estate capabilities have done really well in those fees obviously.
On the alternative side are quite good I am in many of our specialty fixed income capabilities also have nice fees associated with them. So no. We're not thing we're not seeing those really big mandates that sort of flipside us from an eight you eminent fee level perspective come in right now all good questions. Jim we really appreciate.
The other thing I would add to that is the strong collaboration that occurring between PG I am just a lot of good work there to partner together to build out. This this global asset management entity. So thank you.
So.
The next question is from Humphrey Lee with selling and partners. Please go ahead.
Good morning, and think of it taking my questions I'll just a full question on the T. earnings comments, while 2019, when you talked about immaterial for 19 should we think about that as before integration costs and before the amortization all inclusive of those two is just want to get a sense of how.
To think about the.
Particular or anything that from the Aiotv block.
Okay, Great question Humphrey.
When we say immaterial it excludes the onetime costs, but does include the amortization and that immaterial applies to both the alright, alright ASV.
Earnings impact as well as the total company slightly positive from an RSV perspective, once you take out those one time fees.
Then again.
Material at a total company level. So that's what it includes and how we're in encompassing that going forward.
Is there any reason why like for 19.
Incur a little bit higher expenses with respect to to the bulk always just simply the earnings emergence as largely coming from the expected expense savings.
Emerge over time.
Yeah, I think you're right. There I think again a lot large part of that will come once we take on the business and can experience the synergies so.
So that as leading in addition to that amortization of the intangible leading to that immaterial impact at this point.
Okay got it and then shifting gear. So on the PCI flows you talked about kind of I think that talked about still feeling pretty good about the fourth quarter thinking that pass you talked about.
Second half would definitely be positive net flows, but how should we think about the I guess on the full year basis, giving the new Mexico mandate, becoming the fourth quarter and somebody the trend that you have getting do you anticipate barring a market downturn do you expect full year would be positive fatigue.
Yes. Thanks for the question, Yes, we do anticipate the full year cash net cash flow will be positive for 2019.
Thanks I appreciate it thank you.
The next question is from Suneet came up with Citi. Please go ahead.
Oh thanks.
Just wanted to ask a question.
Yes.
Change.
Accounts.
I don't know if that has it.
Big in that business, but I just wanted to get offensive.
Something like that if that becomes a trend could that impact.
Peter in terms of.
Thanks.
Can you elaborate a little bit further on that city.
Yes so.
Change to how they're paying managers separately managed accounts, particularly at their own.
Sure so.
Wondering if.
You guys.
A lot of what percentage of your assets under management, such separately managed account product.
We'd have to get back to you on that we are happy to do it but we sub advised to a number of different platforms, including us and lot of other.
Organizations I I'm unaware of any material change to any of our partnerships except to say that's an ongoing discussion.
Never goes away and one advantage that we do enjoy frankly is the fact that we're not a one trick pony and that we have a lot of business with a lot of different organizations across retirement across life specialty benefits annuities and so those are firm wide negotiations and discussions.
But if something material changes will certainly bring that to your attention I appreciate the question.
I try to follow.
Yes.
The assumption reviews should we expect any impact.
Your year end statutory financials.
Hey reserves, given where we are.
Environment.
What was the last part of that question.
Just on asset adequacy testing reserves or cash flow testing reserves, given current interest rate levels, yes.
Both there I don't expect anything from a cash flow perspective, and specific to the a our it could have a slight negative impact, but very manageable within our capital deployment plan.
Got it.
Thank you appreciate it yes.
John are you there.
Yes, yes.
As John Barnidge.
How should we be thinking about what's happened in Hong Kong right now impact on PPI. There was a story JP Morgan recently set up a trust business in Singapore, just trying to dimension, maybe how the protests and continued friction with China, maybe changing or altering where you're focusing geographically in Asia. Thank you, yes, yes I. Appreciate the question then I'll before us.
Wrote over to Luis No no question around the world there and some of these emerging markets. It's not uncommon that we'd see some of this dislocation. These these still you know when we think about it strategically are very important markets. There's a lot of volatility, but frankly with that volatility comes a lot of of potential growth and you can see specifically in Hong Kong.
We've we've actually seen flows.
Remain quite strong and Thats frankly, one of the advantages of these mandatory.
Systems that you're going to continue to see those flows but Luis you want to add some additional color on on perhaps we'll Hong Kong in Chile.
Okay, Hi, Joan.
In particular, it was a subsea well at the beginning of this week.
Also Thomas Chong, our present for Asia was down there as well so weve spend a fair amount of time, reviewing our operations and implants and contingency plans in particular, so first of all im going to repeat something that already.
Said by Dan as a reminder, our Hong Kong and she liberation are both heavily weighted towards the mandatory pension system. So such a light retailers and other industries, our business relatively well insulated from short term medium term for this kind of a type of market.
Options and second I.
I wouldn't say that you're looking both markets.
We haven't seen any may your macro economic distress for neither for Hong Kong Norbords, Sheila Santiago, even in the very last week for somebody I will.
You know for Chile, you know if that country risk FX interest rates and equity markets are I would say they have had some minimal changes that nothing really important differ element, which is pretty interesting unfurling very interesting for you as a two hour will decide in a robust infrastructure contingent.
The plan digital platforms investments heightened to secure data centers and that is to see where it's needed. We haven't had any major to strengthen our our bridges on being up and running 24 by seven in Hong Kong and Incent. The I will end in Chile, and we have being able to serve our clients.
All the time as needed we have some may main or minor disruptions you know in some branches that nothing really important so I wouldn't say that mortal Kombat I'm proud of the quality of our professionals and you know people and the quality of our operations in both please.
So more to come Joel on in particular in finishing your question we have a very important operation Hong Kong, but also we have a very important footprint in mainland China. So is highly well diversified operation in China, and certainly is a very well connected so.
So more to come.
And then a follow up question you've had strong sales in the quarter in specialty benefits and individual life can you kind of talk about where you're seeing that demand come from maybe.
By sector or by segment within that market. Thank you.
Just before I throw that over to Amy what's also encouraging us just to see that in planned growth just continue to materialize. It's true in our group benefits business. It's true in our retirement business, where people are hiring and as you know a lot of our business a small to medium sized business and so the economy just continues to be.
Favorable to those providers like principle to serve the need to small to medium sized employers Amy.
Thanks, Dan your comments are exactly right on I think one of the things we talk a lot about being in the small mark but I think one of the things we don't talk about quite as much is how much that means our new business. Our sales are driven by business owners, who are making the decision to put benefit or put some sort of that protection product in place.
For the first time, so a good portion of those benefits truly represents a new market for us people, who just haven't historically been purchasers, becoming purchasers. So when you look at somewhere between 20, 530% of our block being produced from that new market, that's exciting for us and I always want to come back and make sure to give our.
Life insurance business the credit that it's due.
We do some amazing things for business owners and the business market for life insurance and so I think one is the biggest complements I can get when I. When I. We've principle is for our intermediaries and other partners to tell us when when we see business market business, we come to principal and so thats driving a lot of our volume that's driving.
A lot of our recognition and I want to give a lot of credit to the team for building out that business market. So well thanks Shannon for the questions.
Yes.
The next question is from Erik bass will the Thomas Research. Please go ahead.
Hi, Thank you you've talked quite a bit about the investments being made in the business and just wondering how are these tracking relative to your expectations and have you identified any places where either you need to do more or you see more opportunity, particularly with the wells block coming on board.
That's a really big Big question you know when in my prepared comments you heard me talk about the principal real start initiative and that's having a profound impact on.
Participants in terms of what they are setting aside for retirement I mean, it's really meaningful the other one and amy's areas that end to end digital life insurance solution again, good traction for those people who may not have an advisor. It works very nicely. The principal benefit design tool again, there's an absence of sort of an.
Understanding sometimes on sorting out and benchmarking against your appears by location in by industry. That's that's helpful.
We use the comments down there were around Mexico, and the partnership with club Premier and again that sense of partnering and again, we've identified that before and then lastly in Hong Kong and the digital Onboarding for the.
The mandatory Provident fund so as we came to you a couple of years ago and talked about making investments in our digital platform. It does come with a price we know that we've realized that see that in the the higher expense structures, but I'd also mentioned that these five items I just mentioned in her about half the portfolio. There's a lot of other really access.
Moving things happening within PG I am I in U.S. I asked all right. So we think very strongly.
Eric that these investments are starting to pay off and I look forward to talking about each one of those in more detail as we come out visiting with you.
Thank you and then sit for our I asked spread can you provide a bit more color on the adverse mortality experienced this quarter and put it into context with the historical results for the business and I guess should we expect more seasonality in the business going forward is the PRT business continues to grow.
Well, yes, I would say that the stand out here is the mortality in the third quarter, which is not uncommon, but I'll ever they add some additional color.
And that's exactly right we did have an.
And unusual level of mortality this quarter, and we would expect to see some variability from quarter to quarter, but when we step back and we look at what our expectations are for mentality versus how the blocks of business is performing we feel very confident and very comfortable what were.
Seeing so we're not concerned with the underlying fundamentals of the business. This was an unusual quarter perhaps.
But perhaps within a.
Normal range of variability as we look forward.
Got it. Thank you I would think third quarter would typically be a seasonably worse quarter in first quarter better is that the right way to think about it.
That is the right way to exactly right. It was just that this third quarter was slightly out of the what we would have good thought would be the normal range.
Got it thank you.
The next question is from Josh Shanker with Deutsche Bank. Please go ahead.
Thank you for taking my question Mccall good morning.
Good morning, Josh.
Your businesses as affected by the type of derivatives that people are taking your assumption reviews for but obviously you have one can you talk in a linked quarter about the various macro factors that affected the the assumption review going forward.
I think it's probably are number one but did you approached the assumption review any differently. This time around the hand past years.
I think every time, we go through the actuarial assumption review with the Chief Actuary and the rest of the financial team everything gets interrogated because things do change there not static, but frankly, we did not see anything relative to an outlier in the derivatives portfolio that would cause us to think about that any differently.
Then we have in the past, we're certainly looking at the interest rates on and Deanna head and frame that accordingly for you. We think it's prudent that it would go out over the next 10 years as opposed to seven years, and we think today, a 4% number versus a 4.5% is appropriate.
So again it gets a lot of scrutiny across to each one of those in DNL stroke, you'll see if you have any additional comments I think dance right on a specifically to that the economic assumptions, which I think is what you are referring to we obviously look at all of those factors probably equity returns and.
Interest rates are the most significant and all the businesses have different sensitivity to each of those.
In the absence of the interest rate change all of the other economic assumptions that were embedded within all of our actuarial models were performing in line with what we had assumed in past assumption reviews. So the only one that was really impactful. This quarter was the interest rate where again, we lowered the underlying 10 year treasury.
The assumption 10, 50 basis points, the starting point decline over 100 basis points from where it was last year and we extended the duration of when we move we would get that long term right.
I would have.
Most significant impact within individual life.
It had a slight impact and in our other businesses, but that was the one that was the most meaningful.
Sometimes insurance companies say certainly in both.
Silos were quick to acknowledge bad news, but slow to acknowledge good news.
Yeah. It's brings rebound more quickly do think that your your internal controls will be less likely to credit assumptions going forward with favorable terms and they would be to reduce assumptions when things go on favorable your way.
Yeah, My comment to that as if you look under the assumption reviews every single quarter every single year, we have a number of positives and a number of negative actually interest rates. The last couple of years had been positives to our annual assumption review as we updated the starting point and the path to get there. So no I mean I think.
We are very prudent both on the plus side and the minus side to make sure where determining the most appropriate assumption at that period of time.
And ultimately will reflect those either whether they'd be positive or negative couldn't spend a fair that's exactly right. Thanks, Josh Phil's question. Thank you. Thanks.
Appreciate it the final question is from Alex Scott with Goldman Sachs. Please go ahead.
Hi, good morning.
First question I had was.
Our if the and I guess I notice the pressure was referenced and release and no no secret that this fee pressure in this business, but it was a little harder to sort of identifying the results because of the integration of wells Fargo and so for us I I'd just be interested to hear your commentary on how much.
Yes. These are feeling that pressure, if there's any kind of change to how you're thinking about how that will progress over the next couple of years.
Take a shot and throw it over to Rene, but I would say apps and if you just took out the wells Fargo IR T acquisition, and just said was there anything subsequently different and the most recent quarters in what we've experienced the last three or four years I'd say no I think it's very much the same drivers and what we're committed to ensuring that we're aligning our.
Expenses with the revenues that we can drive and remember. This this is where you get into that lengthy conversation about the mix of business you get into the various asset classes of somewhat chosen choose or more passive strategy lower interest rate environment. So all of those variables come into it but you have to look at that was recurring deposits coming in at 10 per.
If you look at the growth in the number of plans all the sort of key drivers on the health of the business and our ability to get market share are intact now, having said that and you pointed out very well, Alex we're still seeing pressure in that business, but I'll ask for a day to jump in here and clean that up as well, yes, absolutely. So.
As Dan said I think it's really important to remember into recognize that.
The principal block of business is performing very very well, we do see strong sales, we're seeing strong recurring deposits. Our client retention is running very very strong all of that which of course leads to very strong and good fundamentals for the business.
Which results in is very strong net cash flow and a robust sales pipeline, but stepping back and thinking more at a more macro level you've heard us talk about.
Fee pressures in the C line of business.
And that fee pressure comes from from several sources first is just the intense competitive nature of record keeping and the downward pressure you would anticipate seeing these with fees there.
And the other comes from.
A move towards open architecture and move towards investment.
Asset management strategies that are lower cost in nature and that all puts pressure on Tuesdays that's been a long term trend. If we were to quantify that we would anticipate seeing a gap between see growth.
And the average account value growth.
68% and then there is an additional 1% to 2%.
The compression that we see that comes from.
Moving from Commission basis.
To pay financial advisors to fee based and so what we see in third quarter is.
Very much in keeping with our expectations were very pleased with how that quarter performed.
Again, it's a very strong underlying growth in that business and strong fundamentals and kept with an integration that is absolutely on track for our IR team.
Thanks, Alex.
Got it.
Yes, one follow up quickly yes.
On the actuarial review are there any ongoing impacts to earnings I should think about whether it's the more modestly sized balk a variable annuities are the life insurance for the specialty benefits and some of the dock adjustments humid anything that that will kind of notice on a go forward, but go forward basis.
I think in my prepared remarks, we said that the only.
I wouldn't say, it's material, but the only notable run rate impact would be that you see about a two to 3 million dollar pretax the run rate decline in the individual life business.
Most of that will run through the DAC line.
And we're really expecting immaterial impact than any of the other lines of business.
Got it. Thank you. Thank you.
We have reached the end of our Q1 day Mr. housing or closing comments. Please yeah. Just a couple of very quick comments. The first of which is we recognize these emerging markets are volatile, but it's high reward and and margin in gross we think over long term still play is very positive.
The second as these acquisitions, we look at them through a strategic lens their long term in nature and our view is that there is great scale and capabilities that is derived from acquisitions like the Iraqi business organic growth.
Pointed out is is important to us it's fundamental to a long term successful franchise will continue to be disciplined around pricing and making sure differentiators are known capital deployment very balanced and is Dan had commented in her prepared comments, we feel very good about the capital deployment this year for those.
Are you wondering at the end of 930, there was $250 million of.
The board authorization for share buyback that still remains in place and then lastly, I would say that we very much heavy process improvement initiative going on to help drive revenue and take out expense make sure that we continue to operate in the most effective and efficient manner for our shareholders. So we look forward to December the 11th when we can provide.
You with more.
Our outlook for 2020, and tell you where the businesses wrap up certainly appreciate your time today. Thank you.
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