Q4 2019 Earnings Call
Good morning, and welcome to the principal financial group fourth quarter 2019 financial results Conference call. There will be a question and answer period. After the speakers have completed their prepared remarks, if he would like to ask a question as I time simply press star and the number one on your telephone keypad.
We would ask that you'd be respectful of others and limit your questions to one and a follow up so that we can get you everyone into Q.
I'd now like to turn the conference call over to John Egan, Vice President of Investor Relations.
Thank you and good morning, welcome to principal financial group's fourth quarter and full year 2019 conference call as always materials related to today's call are available on our website and principal dot com backslash, investor falling or reading of the safe Harbor provisions CEO , Dan how soon and CFO Deanna Strable.
We'll deliver some prepared remarks, then we will open up the call for questions.
Well that's available for the QNX session include Rene shop retirement income solutions.
Tim Dunbar Global asset management.
Luis Valdes principal international.
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 are discussed in the company's most recent annual report on Form 10-K 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 measures.
Maybe found in our earnings release financial supplement and slide presentation.
Huh.
Thanks, John and welcome everyone on the call. This morning, I'll share performance highlights for the fourth quarter and full year and accomplishments that position us for continued growth Deanna will follow with details on our financial results in capital deployment 2019, Mark principles hundred 40 anniversary and here in which we closed one of the largest acquisitions and our.
Company's history, we're proud of her more than 33 million individuals, including China, and nearly 200000 businesses more than 80 markets around the world.
I'd like to thank both our customers and our employees for being a part of principles journey 2019 was another good year for principal we delivered non-GAAP operating earnings of $1.6 billion, a 2% decrease compared to a strong 2018 that benefited from a large PGTI performance fee. This result reflects ongoing.
If he pressure continued investments in the business and the impact from the institutional retirement and trust or IR team acquisition.
Throughout 2019, we continued to demonstrate strong business fundamentals ballast investments in our businesses with expense discipline and be good stewards of shareholder capital deployed nearly $2.1 billion, including $1.2 billion for the our T. acquisition.
This acquisition double the size of our U.S. retirement business and positions us as a top three retirement player.
The integration remains on track and will be hard at work truck 2020 to make sure the transition is as seamless as possible.
While working to integrate the acquisition, we continue to grow our existing U.S. retirement business in 2019.
Fair to 2018, or I guess fees sales increased 30% recurring deposits grew 10% and we saw double digit growth an employer matches.
Also want to highlight strong result in U.S. insurance solutions, including record pretax operating earnings for the segment in 2019, both specialty benefits an individual life had record sales in 2019 in particular individual life increased sales by 17% compared to 2018. Additionally group benefits had very strong in group growth.
At our customers expanded their businesses and hired more employees.
Our 2019 principal financial well being index, a proprietary Serbia small to medium sized business owners and leaders shows the business owners are expecting continued growth in 2020, while investing in their own employees, we're well positioned to help these business owners grow with our retirement and protection offerings.
Over the course of 2019 80, U.M. increased $109 billion to record $735 billion. This was a 17% increase over 2018 and provides a strong foundation for 2020.
Additionally, we ended 2019 with $146 billion, maybe you whim, and our China joint venture and $898 billion of assets under administration and the IR tea business after going negative in 2018 total company net cash flow returned to positive for the full year at $17 billion. This.
Included positive net cash flow from every business unit 2019 caps strong decade principal delivered positive total company net cash flow and nine of the last 10 years, despite a very competitive environment or else fee had its strongest year for net cash flow. Since 2012 was $7 billion in 2019, this was higher than our target.
Range of 1% to 3% of beginning of year account value when the Iraqi retirement plans migrate to the principal platform in 2020 2021, the assets will be reported in operations acquired.
Yes spread at $4 billion net cash flow in 2019, driven by strong sales and pension risk transfer income annuities and investment only principal international also generated $4 billion of net cash flow in 2019 and markets 45th consecutive positive quarter. This result, primarily reflects a rebound in Brazil throughout the.
Here as well as a strong flows in Hong Kong principal global investors net cash flow improved in 2019 to a positive.
$1.1 billion, including $2.7 billion in the fourth quarter.
The new Mexico scholars edge 529 plan funded during the quarter with $1.4 billion now managed by PGTI well. The majority of these assets invested in our retail mutual funds.
This contributed to the best quarter for net cash flow in our retail mutual fund platform since the first quarter of 2015.
Clearly 2019 benefited from the management and distribution changes, we've put in place MPG Guy and we're confident and the opportunities that lie ahead.
The synergies between PG I in principal international continues to evolve and drove a large platform win in Hong Kong during 2019.
The team continues to look for opportunities to leverage both our global asset management expertise and the distribution force we have in local markets. The importance of saving for retirement continues to gain traction as private pension reform discussions advanced around the world in 2019, as a leading retirement provider. We're excited about the approval of the secure act in the U.S.
We work closely with policymakers and regulators to expand access to retirement saving plans and deliver guaranteed income and retirement through the workplace today, 30% of the retirement plans, we onboard annually and the U.S. our with companies that have never offered a plan to secure access to improve access to workplace retirement plans by law.
Going small employers to join multiple employer plans and increased tax credits for startup for one k. plans, while the secure act as an important step to expand workplace retirement plan accessing guaranteed income options. We expect market growth will take time to materialize outside the U.S., we continue to use our knowledge and expertise to advocate for plan designed to enable.
Workers to fund retirements that May last 40 years dropped 29 team several governments have made pension reform, our priority, including Brazil in Chile with our expertise in global footprint will continue to partner with governments around the world to promote sustainable policies and desired outcomes for its citizens turning to slide five our investment performance.
Screens very strong at year end, 79% of the principles mutual funds F separate accounts and collective investment Trust were above median for the five year and 71% were above median for the three year are one of your performance rebounded to 84% above median compared to 41% at the end of 2018. Additionally for our mornings.
Star rated funds, 87% of the fund level am had a four or five star rating at year end. This strong performance positions us well to attract retain assets are going forward.
Throughout 2019, we continue to execute on our customer focused solutions oriented strategy as we expanded our global distribution network and array of retirement investment and protection solutions.
We are in more than 120 total placements with more than 70 different offerings on more than 50 different platforms.
This reflects continued strong interest in our specialty solutions oriented and alternative capabilities as well as our success getting these investment options added to third party distribution platforms recommended list and model portfolios.
Additionally, the our T. acquisition enhances our ability to distribute through the consultant channel our increased capabilities in depth of relationships with the consultants are I use and specialist firms will accelerate our ability to achieve new sales. We also advanced our accelerated digital investments throughout 2019 create better customer experiences and drive revenue growth.
While gaining efficiencies. We're now two years in our investments are on track, we saw incremental benefits to both revenue and expenses in 2019 from these capabilities. For example, principal real start our new digital and mobile platform to enroll retirement plan participants as shown tremendous potential to get participants on track to save.
If retirement since its launch in the fourth quarter 2018 more than a quarter of a Megan participants completed the experience and chose deferral rates that are 60% higher than other enrollment methods and one of four participants have elected to auto escalator deferral rate up to 10%.
Additionally, our fully digital experience for purchasing term life insurance launched in the third quarter 2019, and is one of the first of its kind in the industry on average it delivers policies customers two thirds faster than traditional methods, while deanna will cover this in more detail I want to emphasize our balanced approach to capital deployment.
In addition to strategic acquisitions and investments on our business and 2019, we returned more than $860 million to shareholders through common stock dividends and share buybacks. We enjoyed noteworthy third party recognition throughout 2019, reflecting our company's dedication to its core values pension investments named principal one of the best places to work.
And money management.
And we're one of only five companies to have made that list every year since the program was launched in 2012.
We received multiple awards from Forbes, including being named one of America's Best large employers one of America's best employers for diversity and number five on their list of best employers for women.
And cogen syndicated recognize principle as a defined contribution service winter with the highest satisfaction score implant advisory service and support as well as participant service and support the two most critical categories for continued recommendation among defined contribution advisers.
Well, we're incredibly proud of the external recognition principles record level of giving back in 2019 also speaks volumes about our company culture.
Our employees donated more than $6 million and volunteered 55000 hours of their time in 2019 to help people around the world learn earn and save.
This team effort shows how principal strives not only to do business, but to do good in the communities, where we live and work and closing I'm very proud of our accomplishments in 2019 and I'm confident in our ability to execute on our strategy in 2020, well continue to balance investing in our business, while managing expenses in line with revenues to deliver long term.
From value for our shareholders Ghana.
Thanks, Dan Good morning to everyone on the call. This morning, I'll discuss the key contributors to our financial performance for the quarter and full year as well as capital deployments and our capital position at year end.
Net income attributable to principal less $301 million for the fourth quarter and $1.4 billion for the full year.
Quarterly net realized capital losses of $96 million were primarily driven by derivative losses associated with hedging activities with minimal credit losses.
Reported non-GAAP operating earnings were $396 million for the fourth quarter or $1.41 per diluted share.
Excluding significant variances fourth quarter non-GAAP operating earnings increased 13% and non-GAAP earnings per diluted share increased 14% compared to fourth quarter 2018.
The year ago quarter was negatively impacted by a 14% decline in the S&P 500, and unfavorable macroeconomics in Latin America.
Reported full year 2019, non-GAAP operating earnings were nearly $1.6 billion are $5.58 per diluted share.
non-GAAP operating Aro, we excluding AOCI I other than foreign currency translation was 13.1% at year end.
The full year non-GAAP operating earnings effective tax rate was 16.9% within our 2019 guided range as communicated on our 2020 outlook call. We expect our 2020 effective tax rate to be between 16% to 19%.
As shown on slide four we had three significant variances during the fourth quarter, including negative $14 million and RSV, primarily integration costs from the IR T. acquisition.
And a negative 3 million dollar impact in principal international due to lower than expected NK performance in Latin America.
These were mostly offset by a $12 million benefit in PGTI from a reduction in an earn out liability for principal real estate Europe , formerly known as Internet.
This reduction was due to a change in the timing and pattern of revenues during the earn out measurement period stemming from two factors.
Market dynamics allowed the team to sell several properties and liquidate assets in a fund maximizing returns for our clients, which is always our priority.
And we had a delay in receiving regulatory approval to launch a key fund during the measurement period.
First of all real estate Europe continues to perform well and their strong interest in their investment strategies.
As a reminder, and the prior year quarter, we had significant variances primarily due to unfavorable macroeconomic factors that had a net negative 54 million dollar impact to reported non-GAAP pre tax operating earnings looking at macroeconomic factors in the fourth quarter. The S&P 500 index increase over eight per se.
And the daily average increase more than 4% compared to third quarter of 2019.
On a trailing 12 month basis, the daily average increased 6% inline with our full year price appreciation assumption.
Moving to foreign exchange rates I'd like to remind you that revenue expenses and pretax operating earnings are translated using average foreign exchange rates well AUM is translated using the spot rate.
Fourth quarter, AIU and benefited slightly from favorable movements in spot rates relative to the third quarter.
But the average rates remained a headwind impacts to pre tax operating earnings included a negative $4 million compared to fourth quarter 2018, as well as third quarter 2019, and a negative $24 million on a trailing 12 month basis.
Mortality and morbidity were in line with are better than our expectations for the fourth quarter and full year in specialty benefits and individual life very favorable claims benefited specialty benefits full year pretax operating earnings by approximately $19 million driven by $10 million a favorable group life.
On disability claims and the fourth quarter and $9 million, a favorable group life claims and the second quarter over a longer period of time loss ratios remain within our guided range.
All right spread had an experience loss in the fourth quarter that was slightly worse than our expectations and the prior year quarter negatively impacting pretax operating earnings.
For the full year experience was below our expectations within that negative 20 million dollar change from 2018.
Over a longer period of time experience is inline with our expectations.
Both long term in short term interest rates decline throughout 2019, our near term earnings are most sensitive to changes in the interest on excess reserves, our I O IAR rate.
The Io E.R. rate was lower at 85 basis points on 2019, including a 25 basis point drop in the fourth quarter.
This negatively impacted revenue primarily in the IR t. trusting custody business and was reflected in our 2020 guidance for RSV.
Turning to expenses as we've experienced in prior years, we expected total company operating expenses to be higher in the fourth quarter than the average or the first three quarters due to seasonality of certain expenses.
Excluding IR t. and higher variable expenses fourth quarter operating expenses and compensation and other expenses were in line has slightly lower than expected levels.
It's critical that we continue to execute on our investments to position us for long term growth.
Our digital investments continue in 2020, we expect the net pre tax impact to be slightly less than the $50 million to $60 million net impact in 2019.
As more benefits are expected to emerge in 2020.
The following comments on business unit results exclude significant variances from both periods.
Starting with RSV on slide six pre tax operating earnings of $129 million were inline with expectations.
Lower DAC amortization expense was offset by a true up of costs associated with the IR tea business.
Full year 2019, net revenue growth of 11% is above our guided range as the acquisition brought on additional net revenue in the second half of the year.
The quarterly margin was maintained at 25% in the fourth quarter.
Longer term, we expect margins to expand once the acquisition is fully integrated and the expense synergies are realized.
Importantly, the legacy RSV business continues to perform well.
The fourth quarter margin was 33% from the legacy business above the guided range.
As the acquired business begins to transition to our combined platform in 2020, it will become increasingly difficult to provide standalone details on the legacy business.
The fundamentals of our legacy business remains strong.
Compared to full year 2018 sales of $18 billion increased 30% defined contribution participate count increased nearly 300000 participants or 8%.
And that cash flow of $7 billion increased 140% and with more than 3% of beginning of your account values above the 1% to 3% targeted range.
This was driven by strong sales.
10% growth and recurring deposits and low contract lapses.
Turning to slide eight our I asked spreads pretax operating earnings of $92 million were lower than expected, primarily due to unfavorable experience losses lower than expected net investment income and the impact of lower annuity sales.
I asked spreads full year net revenue growth and margin were within our guided ranges.
In 2019 account values grew nearly 13% on strong sales of $10.3 billion.
This includes a record $3.9 billion of pension risk transfer sales nearly 50% higher than 2018.
Looking ahead the pipeline for pension risk transfer sales remained strong despite the low interest rate environment.
As shown on slide nine PG eyes pretax operating earnings of $132 million were above our expectations.
This was primarily due to growth in management fees and performance fees, partially offset by higher variable expenses.
PGTI generated $51 million on performance fees in the fourth quarter.
Of this $32 million was related to a principal real estate fund.
Per the acquisition agreement these were distributed to the investment team and the previous owners, resulting in an immaterial impact to pretax operating earnings.
A portion of the other performance fees earned during the quarter were also passed through as compensation.
As a reminder, performance fees are volatile quarter to quarter.
Full year 2019 operating revenues less pass through expenses increased 2%.
This was within our guided range and excludes the impact of the accelerated performance fee in 2018.
PG eyes margin ended the year at 36% within our guided range.
Moving to slide 10 principal International's pretax operating earnings of $80 million were in line with our expectation and negatively impacted by foreign currency translation benefit from higher than expected inflation in Brazil was more than offset by elevated expenses isolated to the quarter we.
I believe that fourth quarter pretax operating earnings excluding significant variances as a good starting point to use to estimate <unk> earnings in 2020 <unk>.
Excluding the impact of the actuarial assumption review <unk> full year margin of 39% was at the high end of our guided range.
Well on that revenue growth of 5% was at the low end of our guided range, primarily due to foreign currency headwinds.
Turning to slide 11 specialty benefits pretax operating earnings of $98 million were strong due to favorable claims and growth in the business.
Especially benefits had a very strong year and continues to perform well on a full year basis specialty benefits premium and fees increased a strong 7% over 2018 and were within our guided range.
This was driven by record sales of nearly $400 million strong retention and in group gross.
The full year margin was over 14% 130 basis points higher than last year and was at the high end of our guided range.
As shown on slide 12 individual life pretax operating earnings of $46 million were inline with our expectation.
As part of our third quarter assumption review, we lowered our long term interest rate assumptions. This decreased individual life's earnings run rate by about $2 million to $3 million per quarter with the impact beginning in the fourth quarter.
On a trailing 12 month basis individual life premium and fee growth of 5% and margin of 18% or within our guided ranges.
Individual life had record full year sales of $270 million, an increase of 17% over 2018 with over 60% coming from the business market as we continue to focus on solutions for business owners.
At $96 million for fourth quarter corporates pre tax operating losses were in line with our expectations.
For the full year losses of $380 million were higher than our guided range 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 impacted corporate losses relative to our 2019 guided range.
Looking ahead to 2020 I want to remind you that we typically have elevated payroll taxes, MPG guy and higher claims and specialty benefits in the first quarter.
Capitalizing acquisition costs in our group benefits business will improve first quarter earnings for specialty benefits, but we continue to expect earnings in the first half of the year to be slightly less than the second half.
With lower interest rates throughout 2019, I want to provide details on some of the impacts on our general account businesses.
During the fourth quarter, our new money yield of 3.2% was about 50 basis points lower than the overall portfolio yield excluding variable investment income.
This will provide some headwinds to earnings but it will take time for the new money yield to have a meaningful impact on the overall portfolio yield and our operating earnings.
We remain disciplined and updating our pricing for interest rate movements were conservative and the products and liabilities, we have exposure to and we remain diligent around asset liability management.
Well higher rates are incrementally positive our diverse business mix positions us well in this low interest rate environment as shown on slide 13, we committed and deployed $240 million on capital in the fourth quarter, including $152 million for common stock dividends.
$84 million and share repurchases and $4 million to increased ownership in one of our focused investment teams.
This brings full year capital deployments to nearly $2.1 billion or 150% of net income well above our one to 1.4 billion dollar guidance.
2019 deployments included $1.2 billion for the IR T. acquisition and more than $860 million was returned to shareholders through common stock dividends and share repurchases.
At the end of 2019, we had $168 million remaining on our current share repurchase authorization.
As always we will continue to take a balance and disciplined approach to capital deployment.
As a reminder, on our 2020 outlook call, we increased our free cash flow target to 70% to 80% of net income in excess of capital used to fund organic growth.
We are targeting $1.4 billion to $1.7 billion of external capital deployments in 2020.
The full year common stock dividend was $2.18 per share a 4% increase over 2018.
Last night, we announced a 56 cents common stock dividend payable in the first quarter, a 4% 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, including an estimated risk based capital ratio a 410% at year end.
We ended 2019 with nearly $1.2 billion at the holding company nearly $150 million in excess of our targeted 400% risk based capital ratio and over $400 million of available cash in our subsidiaries.
In addition, a low leverage ratio and no debt maturities until 2022 provides a significant financial flexibility.
As part of our 2020 outlook, we provided estimated revenue for full year 2019 by business unit to use as a starting point for 2020.
Actual results excluding significant variances were within these ranges.
I want to remind you that our 2020 margin guidance for RSV excludes the IR t. integration cost.
We continue to expect approximately $55 million to $65 million of integration costs, and our reported pretax operating earnings and RSV.
We will continue to identify these integration cost a significant variances throughout the year.
Looking ahead to 2020, we continue to expect an annual growth rate and non-GAAP operating earnings per share in the high single digits over 2019, excluding the impact of the 2019 significant variances and integration cost and 2020.
2019 was a good year and we remain confident in our diversified business model as well as our ability to execute on our strategy and consistently deliver above market growth.
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. Please 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 Alex Scott with Goldman Sachs. Please go ahead.
Hi, Good morning first question I had was on ARIA fee.
Just wanted to see if you could provide some comments on.
The way the into years gone in terms of any changes to the plans I know there's been some moving pieces around the way commissions are paid in the past.
Also just thinking about the proprietary version Nonproprietary mix of assets.
Would you would you anticipate that as a percentage of the U.M. would sort of begin to flatline or would that continue to.
Move down at the pace it has been moving down.
Yes. Thanks, Alex This is Dan. Thanks for the question couple of notes before throw it over to Renee I don't you when I reflect on the results for 2019. They were really positive you look at that planned growth for on full year basis.
Over 250000, new participants being added over that period of time and frankly, the sales number is really really strong. So the fundamentals of the business remained very much intact. As you know weve had historically very strong proprietary asset management sales in large part because performance.
Has been good and again it differs on size, whether it's small medium or large, but we feel very good about our ability to continue to provide a comprehensive.
Bundled solution, including administration record, keeping and asset management and there's a lot of collaboration that occurs between PGTI and our I estimate that happened, but I'll throw to Renee I know you're excited about what you've got going on not only 2019, Rene but 2020, yeah, absolutely. So I'm Alex Thank you for your.
Question in the first question that you had was around the movement that we're seeing from commission based compensation agreements to fee based.
And the guidance that we provided a last year on this was we would typically see about revenue pressures is about 1% to 2%.
Due to this which of course doesnt impact a pretax operating earnings because its netted out in the expense line.
But we what we are seeing is exactly in line with that.
So when we look at fourth quarter results, we see about a one to one in half percent movement.
From commission to see based and Thats exactly what we would anticipate.
Your other question dealt with the percent of proprietary assets and what we might anticipate seeing their first stuff. We're really proud of the results. Our sales result in 2019, and we introduced pricing and the way that its package to encourage into.
Since proprietary sales of proprietary assets and so if you were to look at.
The percent of proprietary assets for our small and medium sized size plans you would see that they run above market above industry and institutional is pretty much in line with what we see an industry. Despite that we do see downward pressure on this as it is kind of a normal.
Something we've been talking about now for several quarters. It's the result of Oh more propensity for employers, particularly large employers to move towards passive.
And also the bifurcation of the record keeping decision from the asset management in the investment management decision.
If you look at net cash flows overall for target date funds have been fairly flat, but we're we're pleased with what we see in terms of how we perform to market, but we do anticipate that we'll continue to see pressure here.
Ongoing simply because of the bifurcation between record keeping an investment management decision. So I hope Alex.
Yeah that is very helpful and like I appreciate that.
I was in the sales have been quite strong there. So I don't mean that take away from that.
Second question I had was just on secure act if you could provide any more details on sort of getting the action plan or you are you going after multiemployer pulling and is anything in the works there.
Yes, certainly and as you know we advocated for the passage out to secure act we feel good about it really sort of three key pieces of the first of which is the formation as you know the of the MVP use multiple employer plans, we've been in that business for a very long time, so we understand how to work with contracts that have adopting employer. So.
The metals are very much in place there will be a change will end up partnering with a third party to help us facilitate that but there is very much a battle plan in place to help provide small to medium size employers again coverage and improve adequacy. The other was the implant income solution, which again, we've been in the annuity.
Business for 75 years, we know how to do that the safe Harbor is going to give a customers more confidence about adding that provision and then there's a small incentive for small planned formation and the way of a tax credits. So I'd say all in all we look at that as being a positive and as I said in my prepared comments this way.
We'll take time to merge this won't happen overnight, but just like the last major piece of pension legislation.
For gave us auto enroll in auto escalate these things collectively put us in a better positioned to cover more American workers. So net positive for the secure.
Thanks, very much you're welcome.
The next question is from Erik bass with Autonomous Research. Please go ahead.
Hi, Thank you first just one follow up on the secure act.
And specifically the opened map.
Do you see that.
As all kind of new opportunity or do you get a sense for many of your existing small plans that they may be looking to move into kind of an open MEP structure to try to lower their cost, yes, I actually think it's going to be for more new than existing and again you have to recognize and we again as I mentioned earlier.
Eric have some experience in this space because there are limitations there will be a heck of a limited number of plan choices. There are other constituents involved in the decision, making so not only will we see emerge.
Multiple employer plans with volte multiple record keepers after providing those services.
I got to believe every single organization like personal will participate there and as we continue with this digital transformation have our own small employer plans that are very cost effective very convenient and would effectively allow them to have perhaps a little bit more flexibility, but whenever you want to add some additional comments there.
Yeah, I agree that I think we'll see most of the plan take up be with new plans and started clans.
Perhaps the one reason why existing.
Plan sponsors might be interested in it opened up.
As if they can curtailed their fiduciary liability and we're still waiting on final ranks to see exactly how that may play out.
But that could be a driver for Q1 cents existing plans to adopt.
The open that structure, but I agree its claimed to be predominantly driven by new plans and start up plans, but the rigs for what I described in three buckets is over 800 pages long and it's still going require the industry to digest that.
Got it. Thank you appreciate the color there and then secondly is hoping you could talk about the impact of the macro and political disruption in Hong Kong in Chile, and just provide an update on what impact do you see that having potentially on near term results in these markets and for principal international overall.
Good good question I'll make a few comments before throwing it from the Wesun and again I think it's a reminder to all of US as you think about what is appropriate pension policy by country. You also have and although we don't aren't in the record keeping business and France. You also have people on the streets demonstrating against the changes to their.
Mentioned policies and we've been saying for years that the era. The era of personal responsibility and accountability is here governments aren't in a position to funded and sure enough as you look at Chile, and Hong Kong, and France, and other areas around the world, including Brazil, you are seeing more pressure being placed on less.
That officials to come up with a reasonable retirement policy for for people aging and so on one hand, it's a huge opportunity for principal at the same time.
We've got to make sure that were advocating and we're helping steer and drive pension policy in.
I can't think of a better person to talk about that on the international front than what we saw this well is.
Okay. Thank you very much fiery.
A couple of things first to assert with the root cause of these social unrest in Hong Kong, and Chile or first of all completely different also the thing that we have to keep in mind that and in both places they do have different political systems in nature. So hence the evolution piece path of the negotiations on salute.
Just sort of going to be different.
Are going to take quite a miles time and at this moment are kind of unknown.
What do we have in common in this two places first.
We have had no major disruptions in our operations both places and we have had sick when the minor short term financial impact in both locations I wanted to see something we're reporting.
He wants for Hong Kong for 2019, and we're reporting on a trailing 12 month basis record operating earnings for Hong Kong as well. So this is the microcyn earlier in the short term going into macro perspective, and having said that and because you know the severity.
Ration of these social unrest.
Both markets are going into a no growth if not in a recession for the next couple of years.
So what we're doing in light of this new reality, we are re calibrating our operations in Chile and in Hong Kong with two main objectives.
First of all to continue servicing our clients and to protect their interest and to continue improving their costs are extremes and second to keep our expenses in line with our revenues going forward.
We're will revert and we continue monitoring you know how the macroeconomic sort of going to evolve in those markets, but were taken actions and produce an expense actions and wrote to.
To be pretty much more in line about what is might happen in those markets.
Hopefully that help here.
Yes. Thank you.
Good.
The next question is from Jimmy Bhullar with JP Morgan. Please go ahead.
Good morning, other couple of questions first.
The.
Overall results were obviously pretty strong, but it seemed like retirement earnings for each of the past the fee side is that the past couple of quarters have been a little light and I'm not sure how the wells blog is performing worse as they were this will expectations.
And specifically on how much of that had been little fed funds rate is for income.
It accounts.
For the acquired blog.
Okay. Good good questions and make make no mistake. There there is a headwind with interest rates continuing to fall and it is having a negative impact on that trust in custody business, but again I get back to the fact, we're in this for the long haul and feel very good about the fundamentals Rene you want to talk a little bit further about the integration and where it.
We stand absolutely.
Thank you for the question, Jim and I think first off to just be a moment about the fourth quarter results for Ti.
We're very pleased with the results, particularly when you look at the legacy business the growth that we're seeing there the profitability that we're seeing there.
Really very good and very strong our sales results I think our and our net cash flow results are particularly pleasing and we're excited about the impact that we see on Trs.
Our new sales are really being fueled by Trs and that goes all across the board in terms of defined benefit sales being up 33% Aesop speed sales being up 70% a record year for sales for nonqualified. So a lot as straight into the organic growth machine is that legacy.
Business.
As you pointed out when we look at the IR tea business.
The area pressure that we have seen is in the interest on excess reserves.
And we saw an 85% decline in the.
Basis points.
It would reflect for that business and so we are seeing pressures there that's been accounted for in terms of our guidance for 2020, but it does pressure results first.
Fourth quarter quantify.
That is on an annual this is just assuming a stable fed funds rate this year versus there would have been.
Yeah. So how if you were to take the 85 basis points in annualize that the impact on revenue is about 25 to 30 million dollar impact annualized.
But to state it differently. So we have that of course is baked in to our 2020 outlook.
Okay, and if I could add one more you've been fairly active deals, but most of them have been small tuck in type transactions.
International markets and asset management, if you just comment on your interest in deals and specifically if you would be open to a large.
A transaction that you've been mentioned doesn't look like.
A large public companies in the press recently, but just wanted to see if that's something that you would be open do as well.
Well right now what I would say as we are going through the digestion process of the Wells Fargo IR tea business, our highest priority successfully migrating those customers the employees the participants and reassuring the advisors in the distribution community that we are there and save hands and.
So job one successfully migrate those customers and so we've got our hands full for another five quarter say as we transition through that limited resources to.
Execute and bring those those clients onboard, but again as Rene was saying, we're very happy about the progress and other parts of our business asset management is not as connected in terms of the resources and if there is the right opportunity that presents itself to Tim Dunbar and his team around asset management that allow.
I was just to add capabilities and scale, we would want to do that outside the country in terms of replicating more of what we do for P.I.
We've been on the record before we like the countries that we're in.
From time to time, we do get presented with the opportunity to again add capabilities and scale and we would <unk>, we'd look at each one of those on a one off but bottom line is right now we've got our hands very full with digesting what we what we have on the on the full service side does that help Jamie yes. Thank you. Thanks for the questions.
The next question is from Humphrey Lee with Deleon partners. Please go ahead.
Good morning, and think about taking my questions.
I've a follow up question to Eric's question earlier for principal international.
So, but looking at the kind of expenses for this quarter. They looked a little bit elevated and then specifically looking at earnings contribution by country on the local currency basis.
Adjusted for Banco de Chile was lower than what it had been running for the past few quarters than and also China looked a little weaker like I was just wondering can you talk about what's going on there like from Louise comments earlier. It doesn't sound like you are seeing the structural changes or any systemic things going on in there, but I was just wondering is there.
There's some some one off expenses so anything that they can provide some color on I'll make two broad statements before asking Luis to add to it in the first thing I would say is when you're dealing with emerging markets Theres always a lot of volatility there is political volatility currency FX inflation certainly entirely introduces its own set of complex.
Thank you so we're quite a custom the fact that if you're going to do business and emerging market. It comes with a lot of volatility. The second thing I would point out and I still remember the 10 years of which pie was such a big tailwind every single quarter PR represents about 90% of our earnings and if I add Chilean Hong Kong together, it's about 10%.
I don't have the total total learning so.
The bottom line is we are at any given time going to have.
Disruption and volatility in these various markets in which we do business and I wouldn't look at any one quarter in any one year round expenses and somehow think that that was not something that we wouldn't manage effectively so luis you want take it from there.
Yes.
Hi Humphrey.
Let me, let me sort of with China first it's great to expand you know whether youre asking we have certainly it looks like the fourth quarter for China is kind of low quarter, we have a.
Delta between.
Third quarter fourth quarter of $2.9 million in OE pretax and we have built of 3.5 million boats and revenues. So let me try to explain this very very quickly the whole different is about the average 80 wins for the fourth quarter, where you're looking the fourth quarter into in comparison with Freeport It looks flat.
But we have a lot of volatility you know the intra quarter, particularly we have you know $7 billion of negative mid cosmic petrosino. Over then we had positive an enforcement cash flows consequent in November and December so the whole quarter, we have a $3.3 billion negative net customer cash flows.
But the path was completely different so the average was a pretty much more lower than you can expect so with that the impact in our revenues just because the lower average at U.M. It was at $2.2 million to start with Ben you have it out or small impact can throw point $5 million and FX.
Having said that this it was totally expected for the year that 505 billion endorse negative midcoast to make cash flows in 2019 after having $33 billion positive even doors in mid cosmic cash was in 2018 the reason for it.
As the.
Profound movement from money market funds in which were heavily weighted in the Chinese market into equity markets during 2019.
We were pretty flat.
When the average industry had a negative 6% down for you don't money market fund. So we are doing I would say well end to end, but the expansion for China is average AUM for the fourth quarter.
Going into Chile, surely we should have a $26.1 million to explaining all E.
Let me go very quickly with that.
He seems to explain the delta as a 50 million voters in in gushes $13 million positive in third quarter.
Three millions negative in the fourth quarter. So you have attempt a 15 million voters there.
Elevated prepayment fees in the third quarter by $4 million.
And then.
FX impact into revenues was another $6 million, just we do for third quarter and the fourth quarter. So with those numbers you can make the math for chili's. So.
In a constant basis and adjustors bases.
She lives third quarter fourth quarter was a flat you know I would say reflect growth for Chile, that's essentially.
The explanation for both countries.
I appreciate the color. Thank you for that shifting gear to PGTI net flows were positive for the full year and as you look into the pipeline for 2020 on do you expect the positive flows to continue.
Another question on the performance fees.
I know I do I'll ask Tim load answers for himself Tim Yes. Thanks, a lot for that for the question. We did see a lot of momentum building in 2019 for a net cash flows I think we talked a little bit about some of the changes that we've made to management into the distribution team.
Really to the infrastructure any ecosystem of our of distributing our products and and that bodes really well I think the other thing I'd mentioned as just a the strong investment performance and and while it's nice to see a pop in the short term investment performance, but I think I'm, most proud of and what we really focus a lot of our efforts on is really the consistent.
C of the long term investment performance and if you look at that three year, 71% five year, 79% tenure, 91% that really bodes well for the types of solutions, we're trying to create for our clients in our strategy of building retirement investments for all of our clients. So I think thats the.
Backdrop of how we feel about moving into 2020, which is we have some momentum gaining obviously each quarter, we'll have dynamics that will be a little volatile or a little different from quarter to quarter, but as we look at the backdrop, we have a strong pipeline.
We have strong interest in a wide array array of our diverse capabilities. So we look pretty positively at 2000 and Tony Thanks All for.
The next question will come from Andrew Click women with credit Suisse. Please go ahead.
Hey, good morning.
Morning follow up on the sheer next morning.
It's still a few years back you used to provide some stats.
What were your small accounts and I think maybe we could get a sense of what the fees on those accounts, where could you give us a rough idea of what percent of your.
Our I asked deposits relate to small accounts.
And.
What's the fee range is there.
And with that answer.
As we move to met what would be the differential in fees.
If those accounts were to move into a map.
Yeah. So.
I want to make sure and get a good answer here, but I certainly don't remember providing historical pricing because the reality is that.
We custom price nearly all of these plans and are they trs are they not what percentage proprietary.
A product and there is a such a wide range. There what you can sort of expect as I sort of.
Even the definition of what is small what is medium and what is large and the reality is it kind of in our mind, we break it into a third of certain third answer to that total account values are in the small, but a third and what we described as a medium and then third which is large and proportionally the basis points that you get on a smaller plan is going to.
Be larger than the.
Then the very largest plants that we have but on average the margins are very comparable in the end so they're getting back to the full question around maps that is a question I think that just still yet to be answered make no mistake, there will be a lot of cost associated with the us.
I wish meant in the oversight of these maps.
I don't want anybody to get on this call think that it's a panacea that if with the passage of MEP theres all the sudden going to be an incredibly low cost option out there because it I just don't think that that's going to materialize you will overtime provide choice to small employers as Rene described earlier, who may not or may feel that there's a different fatigue.
Machinery role there is being completed or different investment options, but I said I suspect were a year away from being able to answer your question Andrew on on the specificity around the competitive nature of in a map for a small plant.
Got you okay.
And then maybe shifting over to specialty benefits.
Had a really nice.
Change in premium over the last 12 months.
The premium and fees of about 7%.
As you look forward.
Where do you see most of the growth coming we would you expect it and voluntary and with that are you seeing any signs of heavy competition and pricing pressure.
Like an ever remember a time, where we didnt have heavy competition and pricing pressure in any of these benefits, but again a lot of credit to Amy and her team for what they're putting in place their focus their attention, but I'll, let her specifically answer your question.
With regard to kind of starting with the pricing pressure I think we do you always see that pricing pressure I think what.
Feeling a bit of a broken record here talking about the small case market, but when you look at the small case market. There just some dynamics there that.
You know sort of service natural gates. They keep some other competitors out there you got to do things in the scale to you have to process 10000 cases, a year as opposed to 1000 cases here you have to do something with your enforced pricing you have to be willing to look at it as an advantage that you can have.
I have make a pricing decision because you're most of your block is only in one year rate guarantee so what I can guarantee for US is we will continue to grow in that small case market. We've built a system that works for that footprint. We have the underlying technology and we have an awesome salesforce lined up against that I would I would.
You that some of the relationship we have with brokers and advisors, who serve those markets and again they are not always the bigger name sort of regional or national players a lot of these are.
People, who have businesses that smoke serve small local communities and we've established really deep in strong relationships. There. So as the economy continues to grow as businesses continue to hire an AD I would continue to see that being a fuel for our premium in free fee growth for SPD answer the questions Andrew.
Okay.
The final question will come from Ryan Krueger with KBW. Please go ahead.
Hi, Thanks. Good morning. My first question is on international you referenced the $80 million of adjusted earnings as a good starting point going into 2020 that seems a bit lower than what was implied by the guidance in December so I just wanted to.
Clarify if I, if I was thinking about that correctly and if so what caused the change.
Luis you want to help clarify that.
Yes.
Let me try to put this in perspective, because we have had this discussion and particularly when you're looking you know what we have reported that in Q3 first so it looks like we're comparing we have a conversing with is a $92 million versus.
The its important to put this in per se, it's very easy to explain the difference first of all $4 million hit when FX.
The same $4 million you don't that we have.
An additional and then elevated prepayment to pay a premium.
Prepayment fees.
And three more meetings about innovate expenses, there are really think with the recalibration of forward business and the Hong Kong and tooling. So if you were taken that in consideration.
You mean, you're going to make the math between 92, an 80 I really believe that as we said on DNS said the.
80 $81 million that we're proposing is a good representation of our run rate into 2020, and it's pretty much morning inline with our guidance that we've put together in the months of December for Pete.
Okay.
Thanks, and then.
Just just last one on Deanna you mentioned high single digit Dps growth from a normalized level in 2019 is the normalized level around 555, if I'm, if I'm, making all the rate adjustments.
Hi, 55.
[noise]. So I think are you looking at an after tax basis, our pretax basis.
Oh I was I think I.
I thought the high single digit growth.
Growth was for Oh, yes, you're right after it yeah.
I don't have that right in front of me I think how we would do that as we took out all significant variances in 2019, and then we normalized for the integration cost in 2020. So we can get maxion that exactech GPS, but that's how that's what led to that calculation.
Okay, great. Thank you.
We have reached the end of our Q1 day Mr. housing you're closing comments. Please sir yes. Thank you appreciate everyone's questions. This morning up you know I just want to assure investors out there that we spend a lot of time aligning our expenses with our projected revenues that that's always been a hallmark of the organization.
And it will continue to be a focus of this management team second we have we made a big bet with they are to you and successfully migrating that over that does not exclude bus and we focus a lot of time and attention to successfully migrating that business the support and you're starting to see the realization of.
Digital portfolio as we digitize our business and become more relevant we have enormous confidence that those investments will continue to pay off for for investors. So we're going to stay focused on on these efforts and certainly appreciate your continued support look forward to seeing you on the road. Thank you.
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