Q1 2020 Earnings Call
The principal financial group's first quarter Twentytwenty 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 at that time superstar and the number one on your telephone keypad.
We would have thought you'd be respectful of others and limit your questions to one and a follow up so that we can get you everyone in the 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 first quarter 2020 conference call as always materials related to today's calls are available on our website a principal dot com backslash investor. We also posted an additional slide deck on our website with details of our U.S. investment portfolio.
Following the reading of the Safe Harbor provision CEO, Dan how soon and CFO Deanna Strable will deliver some prepared remarks.
We will open up the call for questions.
Well, there's available for the QNX session include.
<unk> retirement income solutions, Tim Dunbar Global asset management.
Luis Fernandez 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 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 financial measures reconciliations of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures.
May be found in our earnings release financial supplement and slide presentation.
Due to the current environment.
We've made the decision to delay our June 23rd Investor Day, and cancel our September 16th Tokyo Investor event.
We are working on rescheduling, our Investor Day, we'll let you know when we have a new date Dan.
Thanks, John and welcome everyone on the call I Hope this call find all of you and your family safe and healthy during these unprecedented times.
This morning, I'll share insights on our strong financial position, how principles responding to cold at 19 pandemic and key performance highlights for the first quarter.
Deanna will follow with additional details of our capital liquidity position the financial impacts from coal bed, our investment portfolio and our first quarter financial results.
We started 2021 of the strongest financial positions in our history and in a better position than we were going into the global financial crisis.
Well Deanna will provide additional details I'll share a few inside.
Highlights the speak volumes to the changes we've made to our business model since 2008.
At the end of the first quarter, we had over $3 billion, an available cash and liquid assets as well as access revolving credit facilities to use for liquidity purposes, and our capital position is strong with over $1.7 billion of excess and available capital as well as an access to contingent capital facilities will continue to be diligent Stuart.
Third of our capital during these challenging times, well weighing opportunities as they arise.
We have a high quality diversified investment portfolio that aligns with our liabilities. The general account has grown in recent years, but so has the quality of the portfolio over the past several years, we've intentionally prioritize risk management.
I want to thank our employees for how resilient they've been in responding to go bad crisis.
The onset of the virus, we have prioritize their safety.
Past investments in technology, and digital solutions allowed us to quickly transition our employees around the world to work remotely today, 95% of our global workforce is remote with no meaningful impact or operations or our ability to serve our customers are.
Our call centers have remained fully operational and we provided easy access to important information on our website for our customers our sales and service professionals are able to take on new business and support existing customers with our digital tools drought or 141 year history, weve stake or reputation on demonstrating in a build.
To adapt and to be there for our customers employees and communities. The Kobe at health crisis has tested every aspect of our business and I'm proud of our nearly 18000 employees, who responded with dedication resiliency and perseverance. This pandemic is impacting all of us in some way and we're adjusting all of our businesses to help our CFO.
Customers manage through some of the near term challenges created by the virus, we've taken actions to helping to reduce the short term financial burdens for our customers by waiting certain fees for participants that need to take co bad related withdrawals and loans from their retirement accounts. Additionally waves certain fees for retirement plan sponsors impacted by go bad to allow.
Participants to access these programs work needed reduce your spend their employer contributions we've extended grace periods for premium payments to prevent lapsing coverage and we have temporarily pause rate increases for our group insurance customers.
As a global company all the communities, where we have operations have been impacted by cold that crisis. In addition to customer relief, we've started community, giving programs to provide relief to the small and medium sized business owners and individuals impacted the most we anticipate these giving efforts through principal in principle foundation in combination with a really.
If we have already offered to our customers total more than $25 billion and these times, we're reminded wire in the business tell people save enough protect enough and have enough and these words take on a very different meaning during this time. While these are unprecedented times, we remain committed to our long term strategy and a diversified business.
Model will continue to serve small medium and large employers who value the comprehensive products and services that we provide to meet the long term retirement and protection needs of their employees.
We look to support their recovery in any way, we can if you recall the small to medium sized business market was resilient as it was the strongest market to recover after the last recession in 2008.
We have purposely diversified across geography is planned size and industries moving to our first quarter results. We delivered non-GAAP operating earnings of $320 million with limited co bad related impacts excluding significant variances earnings were flat compared to the prior year quarter, despite foreign currency headwinds compared the sequential quarter.
Total company, a U.M. decreased to $104 billion to $631 billion at the end of the first quarter. This decline was driven by unfavorable market performance and foreign exchange rates.
Additionally, we have ended the quarter with $140 billion are they you whim and our China joint venture and $780 billion of assets under administration in the institutional retirement trust or higher T. businesses.
The integration of IR T. businesses continue and retirement plans will start to migrate to our platform later this year as planned.
Despite the disruptions in the markets total company net cash flow was a positive $3 billion for the quarter. After a very promising first two months of the year.
All right, yes fee had $2.1 billion a positive net cash flow. This was driven by sales of $4.8 billion and strong recurring deposit growth up 14% versus the prior year quarter.
Hi, aspirin had a half a billion dollars of net cash flow in the quarter driven by $2.3 billion of sales, including a record $1.5 billion of pension risk transfer sales while sales were strong in the first quarter, we do see the pipeline slowing down due to low interest rates and the impact. This environment is having on funding ratios of pension plans.
Principal International also generated $300 million of net cash flow and market 46 consecutive positive quarter, driven by positive flows in Brazil, Mexico and Hong Kong.
Well not included in the reported net cash flow, China had $8.2 billion of negative net cash flow in the quarter.
It was mainly due to the outflows in the first two months of the quarter, partially offset by positive flows in March as result of a flight to quality.
Principal global investors sourced net cash flow was a negative $300 million. This was the result of institutional outflows driven by client rebalancing activities as well as the real estate asset sales earlier in the quarter to take advantage of market conditions and harvest gains for clients.
I was partially offset by record quarterly sales for our U.S. mutual fund and see I T platforms, turning to slide 11, our investment performance remained strong at quarter end, 80% of principal mutual funds ATM separate accounts and collective investment trusts were above median for the five years and 77% were above meeting for three years.
Additionally for Morningstar rated funds, 73% of the funds level am had a four or five star rating. This strong performance it positions us well to attract retain assets going forward.
Ill also share some noteworthy third party recognition of our efforts Barron's name principal global investors as he top five best fund families for 2019, and Lipper named our principal Blue Chip fun has the best fund over the past five years in the large cap growth funds.
We're also been named by Barron's as one of the 100, most sustainable companies in America. Throughout this recent market turmoil, we have not forgotten or moved away from our core values, we talk about withdrawals and claims in terms of numbers, but it is as times like this that we need to remember the human impact in People's lives behind these numbers we are.
Are here to help our customers navigate through the good times and the bad and I could not be more proud of how our teams have come together to help with that let me turn it over to Deanna.
Thanks, Dan Good morning to everyone on the call I Hope you are all staying safe and healthy. This morning, I'll discuss our current financial position impacts from covert 19 details of our investment portfolio and the key contributors to our financial performance for the quarter.
Now more than ever we're committed to helping and protecting our customers.
Typically there has been and we'll continue to be loss of life and livelihood as a result of this pandemic.
We're focused on providing stability and protection to those who trust in principle with their life and disability insurance retirement plan or investment portfolios.
We're offering relief, where we can and providing resources for individuals and businesses as they manage through this crisis.
We know everyone wants to get back to normal and regardless of how long that takes will be here to answer questions provide protection and help our customers emerged from this crisis.
Good has certainly impacted where and how we do business and we've added additional details in our conference call presentation to highlight the various impacts most of which have yet to materialize.
It's important to recognize that the current environment is unprecedented unlike market corrections in the past that was driven by technicals. The current volatility is event driven.
There is uncertainty around how long this will last and what the path to recovery looks like.
We are forecasting the potential impact under a range of scenarios and are being prudent and our decisions relative to that range of outcome.
As shown on slide six our capital and liquidity position remains strong at the end of the first quarter, we had $3 billion available cash and liquid assets at the total company.
And we have $800 million of revolving credit facilities available for liquidity purposes.
We had over $1.7 billion of excess and available capital at the end of the corridor.
This includes $1.2 billion at the holding company nearly $400 million available cash in our subsidiaries and $140 million in excess of our targeted 400% risk based capital ratio at the end of the quarter estimated to be 409%.
We also have access to a contingent capital facility that allows us to borrow up to a billion dollars. The current fair value of the treasury assets in that facility.
We target at least $800 million at the holding company to be able to meet the next 12 months of obligations.
In the near term, we're focusing on maintaining our capital and liquidity target at both the life company and the holding company.
Our non-GAAP debt to capital leverage ratio, excluding AOCI I is low at 22%.
Our next debt maturity of $300 million isn't until 2022, and we have a well spaced laddered debt maturity schedule into the future.
We're in one of the strongest financial positions in our company's history, and we have the financial flexibility needed to manage through this time of economic uncertainty. We're also taking time to understand the potential impacts colvin could have on our business and our financial results.
January and February we're off to a good start with strong sales and net cash flow across many of the businesses.
Things quickly took a turn in March as a pandemic escalated, especially outside of Asia.
The most direct covered related impacts and the first quarter. We're in specialty benefits pre tax operating earnings benefited from lower claims as dental envision provider offices close toward the end of the quarter.
We did not have any known kobin related death, and only minimal Colvin related short term disability claims during the first quarter.
Colvin related expenses of less than $1 million in the first quarter were modest in large part due to the investments. We had previously made in technology and digital solutions for our employees customers and advisors.
Slide five provides details of potential financial impacts from co bad and market volatility that are starting to emerge.
We're keeping an eye on several key indicators to gauge the potential magnitude of the impact.
And the retirement business, we're closely monitoring both plan sponsor and participant behavior and so far the trends have been manageable.
Plan sponsors are just starting to reduce their suspend their company match.
So far we've only had a small percentage of plan sponsors make a change.
From a participant withdraw perspective, Calvin related withdraws have been ramping up as expected, but in total participate withdrawals are only slightly elevated.
Some plan sponsors have delayed transferring their plans until later in the year, but only a handful have cancelled.
This will likely impact the level and pattern of sales, but is expected to benefit our retention levels in 2020.
The recent spike in unemployment is starting have some impacts as we move into the second quarter.
We expect the growth in group benefits premiums as well as retirement recurring deposits will moderate the remainder of the year due to cold made related layoff furloughs and reduce contributions to employee benefit plans.
Full year 2020 sales could be pressured across many of our businesses due to the low interest rate environment and as our customers focus on managing through the pandemic.
Whereas this could negatively impact earnings it reduces the amount of capital needed to support organic growth.
Unlike the global financial crisis. The U.S. government has responded quickly with large fiscal and monetary stimulus programs.
Some of the impacts we've seen so far in April may reverse course as companies and individuals start receiving support.
We have a good history of effectively managing our expenses in line with revenue during times of stress.
The environment is different now, but we have a playbook on how to manage through revenue declines.
Some of our expenses are naturally lower right now like travel sales related expenses and bonus accruals and we're being very intentional on reducing other expenses, including hiring third party spend as well as marketing and advertising. We're reviewing all expenses, but we're going to continue to make investments in our business, including digital in order to.
Drive long term growth.
Many of these past investments are helping us serve our customers and advisors and the current environment.
On slide seven we highlight our first quarter capital deployments and potential impacts to our capital position as sales have slowed and our interest rate sensitive businesses less capital is needed for organic growth.
This will mitigate the expected capital impacts from impairments in draft and our investment portfolio.
We deployed $372 million of capital in the first quarter, including $154 million for common stock dividends and $218 million and share repurchases.
We posh share repurchases in early March as the cobot pandemic emerged we have $850 million remaining on our current share repurchase authorization and we will continue to evaluate and be prudent on future repurchase activity as we gain clarity on the path forward.
M&A opportunities have slowed due to co bed and we expect opportunities that may have been slated for 2022 likely be delayed until 2021.
We now expect our full year 2020 external capital deployments will be between 800 million and $1 billion.
Below the $1.2 billion to $1.7 billion targeted range.
With the fluidity of the environment will continue to evaluate and keep you updated with our current thoughts.
Last night, we announced a 56 cents common stock dividend payable on the second quarter unchanged from the first quarter and our dividend yield is approximately 7%.
As shown on slide eight and nine our investment portfolio is high quality diversified and well position and importantly, we havent changed our investment strategy.
Slide nine provides detail of our U.S. fixed maturities and commercial mortgage loan portfolios. These make up nearly 90% of our U.S. investment portfolio.
As you can see the portfolios our high quality and we're better positioned relative to 2008.
A few key takeaways. We currently have a 1.7 billion dollar pre tax net unrealized gain position and our U.S. fixed maturities portfolio and our risk exposure to end focus corporate credit sectors is manageable.
The commercial mortgage loan portfolio has an average loan to value a 46% and an average debt service coverage ratio of 2.6 times.
We have a diverse and manageable exposure to other alternatives.
And importantly, our liabilities, our long term and we aren't forced sellers.
We're focused on understanding the potential impacts to our capital and liquidity position under a wide range of economic scenarios.
Under the baseline scenario for 2020, which is conservative and has yet to play out our capital and liquidity positions remain at or above targeted levels.
Moving to our first quarter financial results net income attributable to principal of $289 million reflects minimal credit losses of $20 million, which includes changes in valuation allowances recorded under the new Cecil accounting standard.
Reported non-GAAP operating earnings were $320 million for the first quarter or $1.15 per diluted share.
Excluding significant variances, but including the impact of FX non-GAAP operating earnings and non-GAAP earnings per diluted share were flat compared to first quarter 19, despite foreign currency translation headwinds.
We had three significant variances during the first quarter, including a negative 47 million dollar impact and principal international due to lower than expected in high performance in Latin America.
Negative $25 million of higher DAC amortization, and RSP driven by the point to point decline in the equity market.
And a negative 1 million dollar impact in RSV as IR T. integration cost were mostly offset by a reduction in the earn out liability during the quarter.
First quarter 2019 reported non-GAAP pretax operating earnings benefited by $33 million from significant variances.
Looking at macroeconomic factors in the first quarter. The S&P 500 index decreased nearly 20% and the daily average was flat compared to the fourth quarter of 2019.
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 AIU amis translated using the spot rate.
Unfavorable movements in spot rates decreased first quarter am by $27 billion relative to the fourth quarter of 2019.
Spot rates for Brazil, Chile, and Mexico reached historical lows and the first quarter.
Movement in average rates were also on favorable in first quarter. The majority of the decline in foreign exchange rates didn't occur until March and we expect this will have a bigger impact to translated earnings going forward.
First quarter pretax operating earnings impacts included a negative $4 million compared to fourth quarter 2019.
A negative $15 million compared to first quarter, 2019, and a negative $29 million on a trailing 12 month basis.
Mortality morbidity and other claims experience were inline with our expectations for the first quarter in RF spread and better than our expectations and specialty benefits as I discussed earlier.
And individual life mortality losses were worse than expected due to higher severity.
As a reminder are asked spread typically benefits from seasonality of experience gains in the first half of the year.
Both long term in short term interest rates severely declined during the first quarter. Our near term earnings are most sensitive to changes in the interest on excess reserves, our I O era. The I OE our rate was lowered 145 basis points in March to 10 basis points.
Well there was a small impact to IR T. trust in custody revenue and the pretax operating earnings in the first quarter most of the impact will be felt the rest of the year.
For the business units first quarter results, excluding significant variances were largely inline with expectations and we've added additional details in the slides.
The legacy business and I asked fee continues to perform well.
Excluding significant variances the margin for the legacy business was 30% in the first quarter.
The migration of the IR tea business remains on track and we'll start later this year.
As the IR tea business migrate results will be combined into our existing businesses and standalone details of the legacy business won't be available.
The fundamentals of our legacy retirement business remains strong in the first quarter with $4.8 billion of sales $2.1 billion of net cash flow.
14% growth and recurring deposits compared to the prior year quarter low contract lapses and we added more than 450 plans and nearly 75000 participants to our legacy defined contribution business during the quarter.
This does not include any IR t. customers.
Excluding unfavorable and high performance and foreign exchange headwinds principal International's pretax operating earnings were in line with our expectations.
Slide 19 provides our earnings sensitivities to macroeconomic changes. These sensitivities are a good way to estimate impacts to our 2020 operating earnings. It's important to note that we are not as interest rate sensitive as our peers due to our diversified business model.
In closing these are unprecedented times, we expect covered will continue to present challenges to people in businesses all over the world.
Starting from one of the strongest financial positions in our company's history principal will continue to navigate this crisis through a strategic lands and we'll make purposeful decisions for our employees customers communities and key stakeholders.
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 press star and the number one on your telephone keypad now again that star one for any questions. We'll pause for just a moment to compiled acuity roster.
Well.
The first question will come from Jimmy Buehler with JP Morgan. Please go ahead.
Hi, Good morning, everyone first I, just sort of question on the asset management business PGTI.
And the flows being negative this quarter can you talk about how lows in that business trended through the quarter.
And whether most of the negative slowed result was because of what happened in March and.
Or had you been weak throughout the quarter and then any commentary you are able to offer on trends in the business in terms of flaws in.
April.
Very good good morning, Jimmy and I'll throw right to Tim Who's our shortly our resident expert doing a great job running a PJM. So Tim yes. Thanks, Jenny so for the quarter, we had negative 0.3 or 300 million in net cash flows.
And I do think as you think.
It was sort of hill of.
Due to sales during the quarter. So for the first two mine January and February we actually saw very strong sales, particularly as it relates to our platforms and actually I would tell you that that really continue throughout the quarter. We did see a lot of churn in our platforms toward the end of the quarter end March but overall we ended.
For the out $800 million of positive net cash flow and those platforms and that is actually a record for us.
Looted the mutual funds as well as the CIA teas interestingly in mutual funds I would tell you that where we saw the net cash flows were really in equities and blue chip mid cap.
And several of our other equity capabilities in the CIA fees. It was really related to stable value. So you could see some of our clients moving to a little bit safer place.
On the institutional side, we did see negative net cash flows.
A combination of some of our some of our clients really taking some of their real estate. That's off the table I think we've realized and talk to quite a bit about the performance fees associated with the hotel fund in Europe that hit in fourth quarter those assets actually went out the door in first quarter.
A couple of other real estate mandates that contributed to that and then we saw institutional clients.
Really looking to rebalance their portfolios and in some cases build cash for liquidity or to maybe see some market opportunity as they saw what kind of disruptions. We had so those were really that basic trends. Overall, then for the affiliated cash flows which.
I would include the general account, we saw slightly positive about $100 million fan and net positive cash flows.
And have you seen any improvement or further deterioration in trend.
In terms of flows.
So far this quarter.
No actually we are seeing we continue see relatively positive results and I just want to shout out to our distribution team too.
As you know, we're all working from home they have really been instrumental in making sure that they remain related content continue relationships with our clients and they've done a great job, providing insource sources of information and insights into the market as well as into the solution.
And that they need to to build their portfolios going forward and they've just done an excellent. So.
Initially as I said, we were saying flows move to cash and other stable value product right now we're starting to see some of those flows go back into risk assets.
I have had have a bifurcated group of institutional clients that are some that are on the sideline right now and taking a very cautious tone and then you have some that are really poised to take advantage of the marketplace and we're starting to see those come back into the market. So close of flows have been relatively good in April Jimmy appreciate the question.
No problem.
Thank you.
The next question will come from Humphrey Lee Dowling and partners. Please go ahead.
Good morning, and thank you for taking my questions.
On the capital management side I was just wondering if you can provide some color in terms of D. Dimer division how much debt, it's related to halting buybacks versus a slowdown of M&A activities and then also how should we think about what needs to happen before you start resuming buybacks.
Yeah, all good questions and maybe just I'll hit the last one first and throw it over to Deanna, but you can appreciate everyone in this.
Management team.
The people on the phone today average experience was 33 years and they were all here during Oh wait no nine.
And they have.
Ben through this before and we understand the importance of discipline and ensuring that the capital management gets a high degree of priority. I'd also note that it was Julia Lawler, our former Chief investment Officer, Who's our Chief risk Officer, and there has been an enormous amount of work that's been done in the last decade.
To prepare for this very moment and so you'll see is a deanna frames for you the capital deployment and the outlook.
The mindset that we have on ensuring first that we went into this from a very strong position and then we'll emerge this strong position and we'll be very thoughtful as we navigate our way through so deanna.
Great. Thanks for the question. So as you know we did identify on our in our slides that we have lower.
Our target for external deployment, we came into the year targeting 1.2 billion to 1.7 billion.
It includes M&A. It includes our common stock dividends at an include share buyback, we're now lowering that to a range of 800 million. So 1 billion, which does include the 372 million that we deployed in the first quarter.
So if you do the math on that I'm really what it does imply is that Theres limited M&A, we have the reality of the business today and the environment. We're in those options and activities have very much stall. It includes us maintaining our shareholder dividend for the rest of the year and.
At the low end would have no additional share buybacks and at the high end would have nearly 200 million of share buybacks for the rest of the year.
I think it's important to note assets when you're thinking about capital deployment in this time of uncertainty and I think the uncertainty really is evident in that very little of the positive or negative impacts that we're going to see in that are outlined on slide seven have really materialize.
So you want to be very prudent and likely conservative when you're thinking about your baseline scenario. So I wanted just give you a little bit of color on what our baseline scenario includes.
And again that was really what led us to that 800 million to a billion. So our baseline scenario would have 50 to 100000 U.S.U.S. das related to co that it would have the S&P 500, dropping to 2200 I'm in the second quarter, and then ending the year.
2800, obviously, if you look at the market today were above that ending year number already I'm going to has flat interest rates and I are we are for the rest of the year. It has normalizing of spread as we go through the rest of the year. It has very significant decline in GDP.
With a 20 to 25 basis point quarter to quarter annualized rate in the second quarter with some improvement in third quarter in fourth quarter and it has a very 13% second quarter unemployment with some improvement in third quarter and fourth quarter on so I think you'd probably agree that's a conservative baseline.
Assumption, but what is factored into that external deployment targets that we laid out what I would say is you know we're going to continue to evaluate where we end up in that range and we'll continue to be prudent.
Really we're not going to make any decision to change that until we gain better clarity on the path forward, how it's playing out in terms of earning how it's playing out in terms of drifts an impairment, how it's playing out relative to sales and laugh activity I'm within our businesses and so again.
I think we'll be Ana and have a more informed position on the second quarter call and as we go throughout the rest of the year, but that's really how we think about that and Howard framing our capital deployment.
Appreciate the color.
Shifting gear looking at the favorable tend to ambition utilization how should we think about the experience for the balance of the year have you have any discussions with potential premium rebate, if the utilization were to rethink mode throughout the year.
We haven't we've given that a lot of thought and frankly all of our businesses Humphrey across retirement as well as group benefits, but your questions very specific fall asking me to to answer those questions for you Sammy served country. Thanks for the question.
I want to start with thing I. This is unprecedented what's going on the dental and vision in terms of office closures and so.
I think we're all doing the best we can to make sure we get people back to kind of that normal preventative care, because it's right now not available to everybody who wants to have it. So we know that's going to create some pent up demand in the second half of the year, but I want to make sure. We're kind of tempering that pent up demand with some things that I think you're gonna be.
Real, particularly in the dental offices.
I think theres going to be some caution for people to go back and get.
Sort of regular non emergency care and we're also hearing from our dentists, particularly those that we know well in our network, who are saying that they're going to have to have different cleaning and sanitizing procedures in between.
Since they're gonna have to use a personal protective equipment, maybe differently than they have in the past and that might change the speed at which they can see patients on a regular basis. The when when we look ahead, we do see that lower claims how to pattern for dental and vision continuing through second quarter and then there is going to be some offset in third and four.
This quarter, but I'm not sure I see that the dental practices can get back to quite the speed. They had before you asked a question about kind of I would call. It more of a premium relief question.
We've already been looking at premium relief, we've announced may through October that we will do know renewal rate increases and that's not just for dental vision, that's actually for all of our group benefits products. We think thats the right thing to do and we think Thats. The right type of support we should be offering right now if we continue to see a path where people can't Youtube.
Lies our products to get normal care.
Then we will continue to do things and consider other premium relief. So that's kind of what we know right now and that's the best picture. We can give you hopefully appreciate the questions and again when we get to the second quarter call I'm sure, we'll be able to shed a lot more light on these specific programs. So thank you.
Thank you.
The next question will come from Andrew Clinker men with credit Suisse. Please go ahead.
Good morning.
Just to follow up we'll get a little more clarity on what Humphrey was just asking.
When you say M&A auctions have stalled is that because you are not.
At this current prepare to look at more transaction that activity or were there just aren't deals out there and then with with our to the remaining.
200 million of potential.
And your capital redeployment guidance.
I guess that that implies that you probably and just based on Deanne his comments.
It implies that you're probably going to wait until the fourth quarter before we would see anything is that the right what are you.
I guess the way I would respond to your question. Appreciate it first of which is on M&A I think we'd all recognize that people are very busy in terms of just running their businesses.
In M&A is not a sort of short term view on our and our from our perspective. Its long term we've identified targets within each of our businesses that add scale or capabilities things that we feel would be additive to the organization frankly, it was true in the case of the Wells Fargo retirement business. So we're very.
Disciplined and right now the prepared comments were suggesting and because we had shed some light earlier than we are having some conversations that's been pushed off its resources on the other end as much as anything else and frankly people are grappling with simply running their business you'd be inappropriate for me to try to speculate.
Late on share repurchase.
We work very closely with the board and the Board Finance Committee on the deployment of capital.
It's a very disciplined model, but to speculate whether to in the second third fourth quarter would only be that and so again, we'll take a very disciplined approach, making sure that we've got plenty of capital for organic growth, making sure that we have enough capital to ensure that if there is drift in the mortgage portfolio were the fixed maturity portfolios.
That were adequately capitalized to deal with that level of volatility does that help.
Very helpful. And then just following up on high all right, yes. The I believe in slide side you have.
Net cash flow.
The year of 1% to 3%.
And typically you get your previous deposits in the first quarter and your biggest net flow. There. So that's kind of helps it along maybe even get half in the first quarter.
So I guess the question is as you look out over the next 12 months, where might you see that number and I do you think theres going to be a lot of pressure on deposits given that.
We are in a recession.
And the like so.
Yes, so great great question, not Rene you want to you on responses absolutely. Thank you for the question Andrew.
When we consider the net cash flow outlook for 2020, we do see that remaining in the 1% to 3% range for Twentytwenty.
And as you might guess when we look at sales.
We do see that our pipeline has slowed a little bit as result of coated but on the flipside client retention.
Is anticipated to be better so to some extent theres, a natural offset to what we might see in terms of sales.
With respect to recurring deposits, we had an incredibly strong first quarter with a 14% increase over one the quarter one year ago.
And while we do think that the recurring deposits will moderate a bit through the remainder of the here as the results of the environment that we're in we do anticipate seeing strength in recurring deposit.
Which then the last thing that I would touch on with respect to thinking about the annual net cash flow is the participant withdrawal and the behaviors that we might see there.
So maybe to frame this is little bit for you.
When we take a look at the.
Actual participant withdrawals that we saw in 2009, which was the height of the financial crisis.
We saw that those withdrawals, we're about 11% of average account values and those with drills were for any reason so hardship withdrawals loans.
Persons, leaving the plan for any reason.
In Q2 frame matters to give you point of comparison in 2018 that same figure was about 11%. So we do anticipate we'll see a little bit of a kick up but when you take everything all in a under consideration sales offset by better client retention continued.
Strong deposits.
And participant withdrawals that will tick up but we believe still will be in the manageable range, we feel confident in that 1% to 3% net cash flow projection.
Okay that helps Andrew Thanks, a lot.
You're welcome you all right.
The next question will come from Erik bass with Autonomous Research. Please go ahead.
Hi, Thank you Tom can you talk about your outlook for real estate, both in terms of valuations for commercial properties and then the implications from forbearance provisions and loss of rent payments on commercial mortgage loans.
Great question I was thinking it's almost like describing the meaning of light because there's so many different property types within real estate and I think thats, where this conversation really lead us to the quality of the portfolio and a long history of having demonstrated consistently through these peaks and troughs of the commercial rollout.
As a market that our ability to manage that is quite good and we're fortunate because tim's point such an important role in that area for a long time. So Tim you want to respond please sure Eric and it just remind you that obviously, we have a very well diversified commercial mortgage loan portfolio and the metrics going into this crisis are quite good.
So somewhere around 45% loan to values 2.6 debt service coverage ratios I'm going to actually we've been very selective about how weve built that portfolio over the years.
Right now we are starting to see some.
Clients look for debt relief, but in April we had over 99% if our mortgage loans pay on time, and we do have a process, where we're working with them as you know any I see has given us relief through June and we're looking for them to continue to give us relief on credit tourette through the end of the year.
As we look at the as we look at the various asset classes, we would expect hotels retail to both be the hardest hit as it relates to valuation.
There were thinking they might be somewhere in terms of write downs have 30% to 35%.
Really depending on the specifics there so as you know it's very.
Dependent on the location dependent on the quality of the assets.
In our portfolio, we have very little hotel I'm really not much exposure there at all and as it relates to retail.
Were well below the nay Crieff index and waiting to retail and then as you look at our retail more specifically, we feel like we're really well present positioned really not much exposure to mall.
At really only about $128 million in malls, and then not much exposure a lot of exposure to grocery anchored anchored retail, which as you know has actually I'm, probably been doing pretty well.
The rest of the portfolio.
Were overweight and industrial a little over weight and office and those are in Marquis locations.
Very well positioned so we would expect to see write downs, probably somewhere in that 20% to 25% range on average hope that helps.
Yes. Thank you and then I think you had a comment in the outlook slides related to a slowdown in just a real estate activity in some potential impact on near term revenues and earnings MPG I can you provide a little bit more detailed airplane.
Sure a couple of things going on there is that.
Obviously with the with the shelter in place orders the lack of travel little bit hard to go out and private private assets and inspect those properties and really close on those and we've seen a real trail off in terms of acquisition and sales in that marketplace.
That's really abated for the time being we're starting to see a lot more activity pick up people find ways to get out and inspect those properties, if they're virtually or in person. So we would start to see that pick up but we do believe fed it'll be a lag effect in that.
Third quarter, we'll start to pick up somewhat and then fourth quarter. We hope, we'll get back to normal so that delay or the or that back up in terms of our revenue associated with that would be related to transaction fees, which we would see being less.
Or a bit pressured and then being able to put clients' money to work in some of those real estate strategies that we have Eric thanks for your questions. Thank you.
The next question is from Ryan Krueger with KBW. Please go ahead.
Hi, good morning.
Can you give some perspective.
I guess the potential range of margin due to expected.
The relative to the the baseline scenario that you discussed.
Yes, I mean, the bottom line is we haven't changed our ranges for RSV, they're still very much intact.
And it'd be very difficult to sort of try to re imagined what that might look like for the balance of the year. We have fully full our intentions are to deliver on the same same level of.
Of margin and growth, but I'll ask IDN and make any additional comments, yes. The only other comment I'll add Ryan is that the rules of thumb that we have giving in the past than that were included in the appendix are holding together pretty well.
And so I think I would use that as a guide as you think about our growth and margins going forward.
Got it thanks, and then just a follow up on the commercial mortgage loans. When when you were discussing the potential write down in value I guess.
I assume that's related to the overall property value, but given your low LTV.
Actually we expect material write downs on your your loan themselves.
That's right Tim that's absolutely correct I think we expect that we will continue to be in a very good position as it relates actual credit losses on our real estate portfolio. So.
You're right. Thanks Ryan.
Thank you.
The next question is from John Barnidge with Piper Stanley.
Sandler. Please go ahead.
Thank you PST has always had an SMB focus which demands.
Since that larger new entrants usually don't have can you talk about what PST is doing to demonstrate that local presence in a work from a world.
You know it's been amazing.
How fortunate we were to have made the investments that we have in our digital strategy in particular in the back office, the middle office, but equally on the front office, our ability to connect our advisors and our prospective customers on our wholesalers has been extraordinary.
It's working.
We feel like we've got great momentum the pipeline is good but maybe I'll, just ask Rene and aiming to both comment a little bit and Luis because this is an international phenomenon and again this is where technology investments of our rewarding us. So Renee yes, absolutely John Thank you for that question one.
The opportunities that we have taken full advantage of with respect to technology is keeping and very close contact with clients with advisors and consultants.
And participants as we've gone through these unprecedented times.
So we have been very fortunate to not only be able to deploy.
Technology that allows us to reach wide audience is using technology, but also to have the kinds of presentation technologies in place that allow us to continue to showcase our capabilities and continue to allow us to create contacts and deliver on sale and on retention.
In uncertain thing on an ongoing basis, you Didnt I would add is we have been our sales or service teams.
And really not only within our yes, but across the enterprise had been very forward thinking and very proactive in reaching out to every constituent and provide a meaningful information and guidance to them and we have not been reticent, we've been very present and very.
The active in the marketplace and so if anything I believe that our clients participants advisors and consultants have learned that they can rely on us through every single economic scenario and this one without exception.
Give me any brief comments, yes, I feel I feel similar to remain terms in her comments, we've built a business that knows how to install things like 15000, new pieces of business a year and when we can do that we can do that from home just as easily as we can do that from our offices. So I feel really strongly that we have.
We continued our business flow without interruption and Luis you and your team have probably been one of the most aggressive on the digital transformation, but when you respond would you also give us a little bit of color because I think the work that you're doing with ant financial and the joint venture in China.
Speaks volumes about the the ability to ramp up with millions of new customers in billions on the web.
Yes, thanks and.
John Thanks for asking.
So putting together or digital strategy, how did you five years ago essentially.
And then same.
First stage was to be digital ready and then to serve building and putting tools and solutions together, we have a whole BARDA different extreme digital experience, particularly with Jvs. China is one we partner with financial today, we have more than 10 million customers digital customers Edwin.
No human information ulcerative nipple from a cash flows and that part of our business is becoming really meaningful in China. We're trying to replicate the same experience in southeast Asia also with financial in a joint venture with CMB over corner using another you want to experience. So we will we're willing to expand.
All that kind of experience into the southeast Asia region as well.
I think it into Latin America, we have been able also to put solutions and tools b to b to C. D to C in different countries different stages, and we have seen an enormous increased traffic from our customers and distributors and foreigners using those tools three X four eggs.
Depending on which told you are looking for so this is a reaffirmation of the going digital.
It was the right decision and certainly we are going to continually investing in our strategy.
John jumper follow up.
Yes, I don't sells off this you said, 95% employees are working remotely shelters in places are starting to lift do you actually seeing all 95% Im going to go back into an office or do you see real estate savings potentially emerging.
Yes. So the first thing I would say is we're going to take our employees health is the highest priority in terms of how we reload our buildings and as Amy was describing it's been it's been actually hurt warming to see how effective our employee.
He's had been working in a remote environment and you'd never tested this long and any sort of tabletop exercise and it's gone I think better than all of this would have expected and by the way Thats a global number not just a domestic number we think that will end up with a large percentage of our population that wants to come back into.
What I'll call. It traditional office environment, I think we're going to be more comfortable with having more flexibility in how people get their work done, but I will tell you. There's there's more employees than you might think that are anxious to get back for the collaborative nature. The friendships. So I think it is going to change things, having a meaningful.
Change in office commercial real estate I don't know.
Maybe maybe us, but we'll have to see how that goes but we certainly look forward to the opportunity to have a face to face.
Meetings with our.
With our employees.
And the future so hopefully that helps.
Thank you very much art.
The next question will come from Suneet came its with Citi. Please go ahead.
Good morning, just wanted to start with capital.
And I think or maybe as Tim talked about some capital relief from the FDIC on ratings drift.
I was curious about that but also have you guys.
Quantified what one notch downgrade across your investment portfolio.
Require in terms of incremental RBC.
Yes. So good good question appropriate why don't I have.
Tim take it first and then have Deanna clean it up FX in eight that specifically, what I was talking about with any and they I see is that they have granted relief. If you negotiate with some of your mortgage holders.
On to forebear their payments for a period of time.
Typically any I see would require that if you'd hadn't received the payment for 90 days that you would have there would be a fair amount of ratings strip for those commercial mortgage loans.
Dave Abated that through June and we're expecting our hoping that they will continue that through the end of the year and that's what we're working very closely with M&A I see on along with other association.
The other thing I would say as you specifically asked around one notch drop in every I'm not sure. That's the most realistic scenario I think.
If you point to that the high quality that we have and I think the likelihood that most of the drift in impairments are going to happen one in inflect sectors, but two in the lower end of those quality curves well we have quantified what we think in our baseline scenario and it's in the 400 to 800 million dollar range, but that.
Encompasses both dressed and impairment.
The other thing I think ive stayed as that unlike the financial crisis, where it took some time for that materialize and actually you saw that kind of even ramp up over the timeframe. We actually think that this will be very front end loaded with the majority of the impact actually happening in in 2020 <unk>.
I think if you go back to slide seven now I think we have a number of levers that can offset that.
That includes reducing our external deployment, which we've already talked about it includes some of the expense management actions that we're going to take and then I I do think.
You know even a long term we want to continue to grow the sales of our spread businesses. When we do see those reduce we do see lower need for organic growth to support those sales I mean, that's a pretty significant number when you think about how that might add up so hopefully that framed up but but again that was really looking.
Almost sector by sector and an asset.
By asset to come up with that range, and we think it's a pretty reasonable estimate.
Makes sense and just my quick follow up is on something you just mentioned.
Can you help us think about how much capital is freed from lower sales and sort of the natural capital relief that you talk about them.
Yeah, I think it's hard to do because every product has a different capital charge.
I think it could be half of what I, just said from dressed in impairment.
In that range, but some of it depends on how does that common PRT or does that come in income annuities, our retail fixed deferred annuities and so the make up matters.
But I think it could be in that range of half of what I said for impairments and drift.
So two to 400 million yeah got it thank you.
The final question will come from Alex Scott with Goldman Sachs. Please go ahead.
Hi, Good morning, first want to add was on already has the.
Just interested if you could provide any color on on the level that TSH fees on the wells Fargo priority.
This quarter and how that will progress just thinking through the dynamics with with revenue decline and how much offset you think you can get from from the expense side with that business and what that means for overall margins and RSP for 2020.
Yes, Thanks, Alex for the question and before I throw it over to Renee I would just say this we couldn't be more pleased about the acquisition itself.
Some of the economics are not as favorable due to macroeconomic pressures on the business and the and where we're at in the cycle, but in terms of a strategic fit and putting us in a wonderful positioned to compete in all size markets down the road, it's still very very.
Positive for the organization. We're now you want to cover the TSA, yes, absolutely so.
Alex again, just to reiterate we are extremely pleased with this integration. The integration is on track client retention is on track.
Value proposition continues to resonate with clients and also very importantly, there is an incredible amount of collaboration teamwork between the IR team at Wells Fargo and principal we really are functioning as one cohesive team and that matters on several fronts first off.
Our ability to deliver the value proposition in a smooth transition to our clients from our 82 principle, but also our ability to work together to control and to manage costs, including that at the TSA.
So we would anticipate that the TSC expenses would continue to bend down over the course of time as services begin to diminish.
From the IR team and as the IR team please come onto principle.
They are really good news is that everything is on track we feel good about our ability to smoothly migrate customers and we couldn't be more pleased with the progress that we've made.
Thanks, Alex.
One quick follow up on yes.
Any way to think about the level of those he has a piece I think they've been hovering around 95.
In dollars are so I mean, well they do you have a way to reduce those it all before the end of the year when I think you're going to move more of the assets onto your platform.
Good question.
So Alex this is Rene again.
We would anticipate the TSC fees come down as clients and employees begin to migrate.
And keep in mind that the clients will start to migrate at the end of this year, but the migration will continue into Twentytwenty. One so we'll see some moderation of to say expenses, but I think you'll see the largest moderation begin to occur next year.
We have recently.
Oh. Please go ahead operator.
We have reached the end to end of our Q1 day session Mr., how senior closing comments.
Yes, I'd be happy to you know when I. When you think through these most challenging times you ask yourself, whether or not the strategy is has worked and well work and I think about 33 million customers that we have the 200000 business owners that we have around the world and the demand for our products and services are relevant in high demand and I don't see.
That changing so the strategy is very much on track I have to tab and humbled by our employees ability to adapt to this new environment I couldn't be more proud of their resiliency and their commitment to support our customers participant as well as the plan sponsor in our institutional customers.
We have worked frankly tirelessly to serve our customers to help them through the crisis with resources technical support and concessions to help bear some of the burden that that employers are going through I'm convinced shareholders are going to be rewarded as.
As we work our way through this process and it is challenging but with that I would just say this I wish you much health and happiness and safety. As you also worked through this challenging time and look forward to talking you at the end of the second quarter. Thank you.
Thank you for participating in today's conference call. This call will be available for replay beginning at approximately one PM Eastern time until end of day March 4th Twentytwenty 7354, 068 is the access code for the replay the number to dial for the replay is 855.
Slide nine 2056, U.S. and Canadian callers or 4045373 406 international callers.
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