Q2 2020 Principal Financial Group Inc Earnings Call
Good morning, and welcome to the principal financial group's second quarter Twentytwenty financial results Conference call. There will be a questionnaire to period. After the speakers have completed their prepared remarks, if he would like to ask a question at that time simply press star and the number one on your telephone keypad.
We would ask that you'd be respectful and others and limit your questions to one and a follow up so that we can get to everyone. In the queue I would now like to turn the conference call over to John Egan, Vice President of Investor Relations.
Thank you and good morning.
Welcome to principal financial group's second quarter 2020 conference call as always materials related to today's call are available on our website and principal dot com backslash investor.
Similar to last quarter, we posted in traditional slide deck on our website with details on our U.S. investment portfolio.
On the reading out the Safe Harbor provisions CEO, Dan House, and CFO Deanna Strable will deliver some prepared remarks, then we'll open up the call for questions.
Well there's available for the QNX session include were nice shop retirement income solutions.
Tim Dunbar Global asset management.
Luis Valdes principal international and Amy Frederic 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 strategies.
Risks and uncertainties that could cause actual results to differ materially from those expressed or implied or discussed on the company's most recent annual report on form 10-K.
By the company with the U.S. Securities 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.
Maybe found in our earnings release financial supplement and slide presentation.
Our 2019 corporate social responsibility report was released a few weeks ago learn more about how we are working to build a more inclusive resilient and sustainable global community by reading the report on principle Dotcom, Dan Thanks, John and welcome to everyone on the call I hope, you're all well when it found some sense of nontoxic during these unprecedented.
James.
This morning, I'll provide an update on how principles responding to the cobot 19 pandemic and its impact on our global economy, our strong financial position. He performance highlights for the second quarter and how we are well positioned for long term growth.
Deanna will follow with additional details on our capital liquidity position and our investment portfolio as well as the impact Rico bad and her second quarter financial results.
The safety of our employees in our customers continue to be top of mind is a vast majority of our employees continue to work remotely.
Previous investments in technology, and our accelerated digital investments have enabled us to rapidly meet the challenge ever changing operating environment, our ability to communicate effectively with our employees distribution partners and customers has allowed us to minimize disruption and service to our 32 Megan global customers.
Consistent with our core values in mission, we continue to help our customers and communities through this pandemic sensed announced in April the giving chain powered by principle has provided more than 50000 meals for more than 120 businesses in over 30 communities around the world and we continue to focus on reducing the financial burdens that our customers.
Maybe facing by waving certain fees for participants, taking kobin related withdrawals and loans. The mere retirement accounts. We're also working closely with plan sponsors and group employer customers to maintain their retirement and protection plans. This pandemic has certainly created some challenges for principal to overcome but our diversified business model has been really.
So again I'm confident that were in the right businesses with the right teams in place and we'll continue to make investments to create long term shareholder value, we serve our customers across small medium and large businesses and the U.S. and we know there are some concerns about the health of small to medium sized businesses right now.
We're finding that the impact from coal bed is less about large versus small businesses and more about what industry businesses in.
As shown on slide seven we have less exposure to the industries that had been the most impacted by Kobe, including accommodation and Foodservices retail trade and Archon Entertainment and we have more exposure to industries that are less impacted such as professional services wholesale trade and finance and insurance.
Well the impacts of unemployment any economic recovery are uncertain and vary by industry. The amount of stimulus business owners have received from the U.S. government. He is unprecedented and has helped stabilize businesses during the quarter as a result, our U.S. retirement and group benefits businesses have had less of an impact from the current environment during the second quarter than some may have expire.
Acted due to our intentional diversification by industry and geography, turning to slide eight we remain well capitalized on her in one of the strongest financial positions in our history at the ended the second quarter, we had over $3 billion and available cash and liquid assets and over $2.3 billion of excess and available capital looking to.
Seem to be diligent stewards of our capital and take a balanced and disciplined approach to capital deployment carefully weighing opportunities as they arise.
Moving to our second quarter results, we delivered non-GAAP operating earnings of $403 million, excluding significant variances earnings were down 8% compared to the strong prior year quarter, partially driven by foreign currency headwinds.
During the quarter, we continue to make progress to align our expenses with revenues and our second quarter results reflect benefits from our expense management actions.
Compared to the first quarter total company, a U.M. increased $71 billion to $702 billion at the end of the second quarter.
This increase was driven by favorable market performance as well as the positive net cash flow market performance contributed $67 billion to Hey, you ended the second quarter, helping to offset most of the unfavorable performance in the first quarter.
Additionally, we ended the quarter with $142 billion. They you women are China joint venture and $713 billion of assets under administration, and the institutional retirement and trust or IR T. businesses through the first six months of the year total company net cash flow was a positive $9 billion, including more than 6 billion.
Dollars in the second quarter on a trailing 12 month basis net cash flow of $23 billion improved significantly from $400 million in the year ago period with $21 billion of the increase for PGTI. This achievement highlights the strength of our distribution network, our investment performance and our in demand products and solutions.
Our I asked fee generated over $700 million a positive that cash flow. This was driven by sales of $2.8 billion.
Low contract lapses and continued but pressure growth in recurring deposits transfer deposits were down compared to a year ago period due to lower sales, while participant withdrawals were slightly elevated but in line with our expectations. During a stressed period, our I ask spread net cash flow was flat despite $2.1 billion of sales.
Including $1.1 billion of opportunistic issuance and investment only.
Due to low interest rate environment, we've started to see the pension trust transfer pipeline slow down and we continue to expect lower annuity sales for the remainder of the year principal international generated $900 million of net cash flow and markets 47th consecutive positive quarter driven by positive flows in Mexico, Chile Hong Kong.
In Brazil, our collaboration between principal International MPG I continue to show results as we won a large institutional mandates in equity funded Mexico. The investments that we've made in the digital platform in Chile, you're also paying off as we've continued to onboard and service customers. During this pandemic.
Well not included in the reported net cash flow, China had $4.6 billion of net cash flow in the quarter as market volatility drove investors to money market funds.
Hi source net cash flow was a positive $4 billion. This was our highest quarter of both PGTI sourced and institutional net cash flow since 2016 and was aided by the continued strong net cash flow on our mutual fund platform.
Institutional sales were across a number of equity in real estate strategies and the current low interest rate environment. There is to increase demand for yield and proven investment performance.
As shown on slide 14, our investment performance remained strong at quarter end, 75% a principal mutual funds EPS separate accounts in collective investment Trust were above median for one year, 81% above median for three year and 80% were above median for five years I.
Additionally for our Morningstar rated funds, 77% of the fund level AUM at a four or five star rating. This continued strong performance positions us well to attract retain assets going forward. The strong net cash flow across the company is a testament to the great work our teams have been doing in a challenging environment to create in demand proud.
Thanks, and leverage our digital investments a few examples include MPG IR principal Blue Chip Fund was awarded the best large cap growth fund over the past five years by Lipper and Printwear real estate investors was named a 2020 green lease leader achieving gold recognition from our commitment to high performing and sustainable property.
Management Brazilprev, our joint venture with Banco to Brazil in principal International has had great traction with Brazilprev Facil, our retail long term savings product the requires no money to open and only a contribution of about 20 us dollars per month to maintain an account and under two years, we have sold more than 500000 plans.
As we've reduced the barriers to entry for long term savings and helped in underserved market from a digital perspective, our principal mobile App is now a top rated happy in the App store in the retirement industry with more reading an actionable feedback than our competitors. We also launched and interactive dashboard for retirement plan sponsors and advisors to.
Understand the behaviors of plan participants since its launch in April we've had extremely positive back on the dashboard and it's a differentiator for principal in the marketplace.
An individual life, we've seen continued adoption of our term life online self service tool.
Principal life online one of the first fully digital experiences in the industry. Since January we've had 25000 applicants utilizes tool by leveraging our digital application tools and investments in the underwriting automation more than a third of our underwriting approvals are able to be completed with less than 10 minutes of underwriting time.
Through the first six months of the year I'm proud of our 18000 employees executing our diversified and integrated business model, our capital position remains strong and we continue invest for the future while aligning our expenses with revenues before I turn the call over to Deanna I want to make a few comments regarding principles dedication to socially quality.
Principle has a strong history of doing the right thing and in terms of diversity and inclusion we have an extensive track record on big recognized for our efforts, including being named by Forbes is one of the best employers for diversity in 2020 global inclusion as a business imperative for principal and we are driven by our purpose of making financial security.
Yes, it will to all.
While we are all proud of the efforts thus far we continuously push ourselves to do better both in our communities and our workplace with that let me turn the call over to Deanna Deanna. Thanks, Dan Good morning, everyone on the call I Hope you all staying safe and healthy this morning, I'll discuss our current financial position details of.
That portfolio impacts from covert 19, and the key contributors to our financial performance for the quarter.
We remain committed to helping them protecting our customers through this pandemic cobot has certainly impacted where and how we do business and we've included additional details in our conference call presentation to highlight the various impacts many of which have yet to fully materialize.
Well there is continued uncertainty on how cobot and the related market impacts play out over the next 12 to 18 months I'm pleased that many of the metrics were tracking are trending better than we expected they what a quarter ago.
As shown on slide eight our capital and liquidity position remained strong.
At the end of the second quarter, we had $3 billion of available cash and liquid assets at the total company and we have $800 million of untapped revolving credit facilities available for liquidity purposes.
We had $2.3 billion of excess and available capital at the end of the quarter. This includes nearly $1.6 billion at the holding company almost $750 million higher than our target of approximately $800 million to cover the next 12 months of obligation.
$400 million of available cash and our subsidiaries and $340 million in excess of our targeted 400% risk based capital ratio at the end of the quarter estimated to be 422%.
The RBC ratio is higher than our target due to uncertainty and the timing and impact credit draft and credit losses could have on the rest of 2020 and beyond.
Overtime, we expect the RBC ratio will trend down to our targeted 400%.
Our excess capital at the holding company increased during the quarter and reflects the 500 million dollar opportunistic debt issuance. We completed in June at a very attractive coupon rate of two in one 8%.
While we don't expect to need the proceeds from this issuance under our baseline scenario. It provides additional financial flexibility and offers protection if the environment deteriorate.
We also have access to a contingent capital society that allows us to borrow up to approximately $1 billion. The current fair value of the treasury assets in that facility.
Our non-GAAP debt to capital leverage ratio, excluding AOCI I is low at 23.5%.
Our next debt maturity of $300 million isn't until 2022, and we have a well space laddered debt maturity schedule into the future.
In the near term, we remain focused on maintaining our capital and liquidity targets at both the life company and the holding company.
Despite the pressures of the current environment, we remain in one of the strongest financial positions in our company's history, and we have the financial flexibility and discipline needed to manage through this time of economic uncertainty as shown on slide nine we deployed $154 million of capital in the second quarter for common stock dividends.
As a reminder, we pause share repurchases in early March as the pandemic and the resulting market volatility emerged we have $850 million remaining on our current share repurchase authorization to determine when will restart repurchases were looking for enhance clarity instability in the macro environment for the.
Range of possible outcomes to narrow and to have a better understanding of timing of the potential impacts we are well positioned today, but we're being prudent on capital management given the uncertainty.
As discussed last quarter, we continue to expect our full year 2020 external capital deployments will be between 800 million and $1 billion, which is lower than the target that we had at the beginning of the year.
Capital is expected to be pressured by credit draft credit losses, and lower operating earnings some of the pressure will be offset by a lower level of capital needed to support sales lower external deployments expense management actions and our recent debt issuance.
Last night, we announced a 56 cents common stock dividend payable in the third quarter unchanged from the second quarter and our dividend yield is approximately 5%.
As shown on slides 10, and 11, our investment portfolio remains high quality diversified and well positioned and importantly, our investment strategy hasn't changed.
Slide 11 provides detail of our U.S. fixed maturities and commercial mortgage loan portfolios, which represents nearly 90% of our U.S. investment portfolio. The portfolios remain high quality and we're better positioned relative to 2008.
A few key takeaways at the total company, we are in a $3.5 billion net unrealized gain position.
This includes a 5.5 billion dollar pre tax net unrealized gain in our U.S. fixed maturities portfolio, which increased $3.8 billion during the second quarter as spreads tightened.
The commercial mortgage loan portfolio has an average loan to value a 50% and an average debt service coverage ratio of 2.6 time.
We have a diverse and manageable exposure to other alternatives and high risk sectors and importantly, our liabilities. Our long term, we have disciplined asset liability management and we aren't for sellers.
We're continuing to evaluate the potential impacts to our capital and liquidity position under a wide range of economic scenarios, our capital and liquidity positions remain at or above targeted levels under our baseline scenario for 2020 and into 2021 and the first half of the year, we have had approximately $115 million.
Impact from credit draft, and credit losses, with more than $80 million and the second quarter.
Full year 2020, we're now expecting approximately 300 million to $500 million of credit draft and credit losses lower than the 400 million to $800 million, we estimate it on the first quarter call.
Using the global financial crisis as a guide we're expecting additional kind of draft and credit losses to emerge beyond 2020, due impart to impacts from the U.S. government recent large and unprecedented fiscal and monetary stimulus programs.
We're continuing to watch the situation closely modeling several scenarios and we'll continue to evaluate the impacts and communicate estimates as more clarity emerges.
Slides five and six provide details of the Kobin related financial impacts we've experienced in the second quarter as well as updated thoughts on potential impacts the pandemic could have on our business and our results in the future.
In the second quarter and many of our businesses experienced direct kobin related impacts.
Pre tax operating earnings benefited by a net positive $51 million and included 68 million dollar net benefit in specialty benefits as very favorable dental and vision claims as well as favorable short term disability claims were partially offset by coded claims and group life and premium assistance for our dental customer.
Yes.
A 4 million dollar benefit from favorable mortality in various spread.
These benefits were partially offset by a negative 15 million dollar impact from unfavorable claims and surrenders and individual life.
In a negative $6 million and arias fee from waive fees for cobot related participant withdrawals.
The net positive benefit from Kobin related impacts this quarter shows why did the benefits of our diversified business model as well as the relative magnitude of our dental business.
As we incorporated our experience from the second quarter into our modeling we have reduced our estimated after tax impact to non-GAAP operating earnings from $20 million to $10 million for every 100000 U.S. coded related death.
This reduction reflects a lower incidence of kobin related death, and our insured population.
Note that this sensitivity only includes the direct U.S. mortality and morbidity impacts in U.S. insurance solutions, RF spread and principal international.
It does not include the indirect impacts on claims experience due to office closures or reduction in elective procedures for dental vision, our disability and specialty benefits.
We're continuing to monitor several key indicators to gauge the potential magnitude or the financial impact from covet and the related market Volatilities.
And the retirement business trends in both plan sponsor and participant behavior were pressured during the second quarter, but are manageable well still positive growth in recurring deposits slowed during the quarter to 1.5% compared to the prior year quarter.
Participants, making deferrals were down modestly from pre called at levels due to lay offs and furloughs and so far less than 1% of plan sponsors have reduced our suspended their company mats.
For those participants still contributing to their plan the average deferral rate hasn't changed from pre coven levels signaling active participants haven't reduce their contribution.
Looking at withdrawals Kobin related participate withdrawals have increase but they are partially offset by lower hardship withdrawals and loans as we expected.
In total participate withdrawals are only slightly elevated.
Plan sponsors are continuing to delay the decision to transfer their retirement plans and many sales could be pushed into 2021. This is certainly impacted the level of sales in the second quarter, but was partially offset by strong retention.
Specialty benefits had very strong persistency in the second quarter as there was a heightened focus on protection products by employers and we provided enhance service and support to our customers.
And group benefits the number of lives covered under our existing plans as a good indicator of employer behavior.
And the second quarter covered lives decreased 1.4%, which is significantly better than the chains in the unemployment rate.
Breaking this down a little further a majority of the impact in the second quarter was from businesses with 200 or more employees with less of an impact and businesses with fewer than 200 employees overall in specialty benefits, we're expecting the pattern a pre tax operating earnings to emerge differently. This year earnings from dental and vision are expected to be.
Pressured in the second half of the year relative to what we experienced in the first half due to dental premium credits and increased dental utilization and individual life. While sales are down overall, we've seen an increased interest in term life insurance.
Allocation volume is up due to increased awareness of mortality and our enhanced digital capabilities and digital distribution.
We have a strong history of effectively managing our expenses in line with revenue during times of uncertainty and market volatility during the second quarter, we continue to make progress reducing our expenses to align with revenues.
Compared to our expectations at the beginning of the year, we reduce expenses by approximately $75 million and the second quarter alone. This is spread across all businesses and contributing to resilient margins despite revenue pressures.
Some of the expenses are naturally lower right now like travel sales related expenses and bonus accruals and we've intentionally reduced other expenses, including hiring salary cost third party spend as well as marketing and advertising.
These actions will continue to impact earnings and margins the rest of the year.
For full year 2020, we're expecting our actions will reduce expenses by $225 million to $275 million relative to our expectations at the beginning of the year.
Not all of the expense reductions are permanent and they will likely come back at different paces hiring in salaries will return at some point and bonus and incentive accruals will naturally reset in 2021.
Some expenses may return at a more gradual pace and at an overall lower level like travel our commitment is to align growth in expenses with revenue, but there's always some lag with the amount of volatility we are experiencing.
Moving to our second quarter financial results net income attributable to principal of $398 million. This includes net realized capital losses of $4 million with manageable credit losses of $21 million.
Reported non-GAAP operating earnings were $403 million for the second quarter or $1.46 per diluted share, excluding significant variances, but including foreign currency translation headwinds non-GAAP operating earnings was down 8% and non-GAAP earnings per diluted share was down 6% compared to second quarter.
2019 as shown on slide 13, we had several significant variances during the second quarter. These had a net benefit to reported non-GAAP operating earnings of $36 million pretax $27 million after tax and 10 cents per diluted share pre tax impacts included in that part.
51 million dollar benefit from Colgate related claims and other impacts in our RF and U.S. I ask businesses as I mentioned earlier.
And that positive 29 million dollar benefits and principal international due to higher than expected and high performance in Latin America, partially offset by lower than expected inflation, primarily in Brazil.
An 18 million dollar benefit from lower DAC amortization and various fee driven by the point to point increase in the equity market.
And a positive 1 million dollar impact in various fee as IR t. integration costs were more than offset by a final reduction and the earn out liability as we released the remainder of the liability in the second quarter.
Revenue retention remains in line with our original expectations.
These positive benefits were partially offset by a negative 44 million dollar impact from lower than expected variable investment income and our Jaeson U.S., yes.
Slightly more than half of the impact was from lower than expected alternative investment returns with the remainder from lower than expected real estate sales and prepayment fees.
Additionally, we had a negative 19 million dollar impact in specialty benefits from unfavorable noncovered related individual disability insurance claims experience driven by higher incidence.
Looking back second quarter, 2019 reported non-GAAP operating earnings benefited from significant variances by $27 million pretax and $21 million after tax.
Looking at macroeconomic factors in the second quarter. The S&P 500 index rebounded and increased nearly 20% while the daily average was down nearly 5% compared to the first quarter of 2020, and only up slightly more than 1% from a year ago quarter.
This is pressuring revenue growth in our fee based businesses relative to these two comparison corridors.
Moving to foreign exchange rates I'd like to remind you that revenue expenses and pre tax operating earnings are translated using average foreign exchange rates well AUM is translated using the spot rate.
Movements in the average rates continue to be unfavorable during the quarter impacts the second quarter pretax operating earnings included a negative $7 million compared to first quarter 2020, a negative $18 million compared to second quarter, 2019, and a negative $40 million on a trailing 12 month basis.
While interest rates remained relatively unchanged during the quarter second quarter revenue and earnings for the IR T. trusting custody business and RSV were impacted by the 145 basis point drop in the interest on excess reserves, our I O. We are rate in March.
We estimate the drop in the I OE our rate in first quarter, we'll have a negative $30 million pre tax impact on full year, 2020 revenue and earnings and our ASP.
For the business units second quarter results, excluding significant variances were largely inline with expectations given the current macroeconomic environment and we've added additional details in the slides.
The legacy business and RSV continues to perform well given the current operating environment, excluding significant variances the margin for the legacy business was 33% in the second quarter.
The migration of the IR tea business to principal platforms remains on track and we'll start later this year.
As the IR tea business migrates results will be combined into our existing businesses and we'll begin to realize some of the synergies, but standalone details of the legacy business won't be available.
In closing coded and the related market volatility are certainly impacting us, but we're managing through these unprecedented times, we're being prudent with both expense management and capital preservation in order to mitigate impact and be prepared as the impacts play out.
Our diversified and integrated business model continues to serve us well and our financial strength and discipline positions us well to navigate the crisis.
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 followed by the number one on your telephone keypad again that star one we'll pause for just a moment to can tie all the acuity roster.
And the first question will come from Suneet came up with Citi. Please go ahead.
Thanks. Good morning first question on Arias fee, just looking at slide 15, it looks like your net revenues increased about 19%, but the earnings whether reported or sort of normalize were down kind of 8% to 12%. So I'm just trying to understand what the disconnect is between.
In revenue growth and earnings growth.
Yes. Thanks for me for the question I'll, just ask for native to respond to that yes, absolutely. Thank you for that question.
I think in order to understand the results that were seeing here, it's important to look at both those legacy business as well as the IR tea business.
And first off if you look at the legacy business as Deanna indicated in her remarks, we are seeing the pretax.
Return on net revenue.
Remain very consistent in second quarter of 20 over second quarter of 19 about 33%.
When we look at the IR team block of business Theres, a couple of things to keep in mind.
First off you will see that.
Gration expenses will be will create some noise and some volatility from quarter to quarter and so it's important to.
Jeff your model for that.
Second as also pointed out in the comments.
We are seeing pressure from the Io E.R. rate and then last of all I would.
Remind you that as the eye on key block of business transition from Wells Fargo to principal there will be a lag between when we see the expenses began to decline along with the decline in the business. So we will see necessarily somewhat.
Is there and when you take all those things into consideration.
That creates a different.
Does that help.
I mean, it sounds like just look at the income statement it sounds like the compensation and other line was the one that really increased year over year is that where most of that impact was.
Yes.
Other line is going to reflect the TSH expenses.
And that so that's the portion that is going to have the most noise as we begin to migrate the business over.
Turning for integration.
Those classic examples of sleeve, where we're getting the expenses front end loaded as we.
Nearly have to double up to get the business successfully transitioned let alone all the resources going into programming and application development and the transitioning of the services did you have a follow ups. Nick I did just sticking with RSV on the comment about releasing the earn out liability.
Is that because the macro environment changed or did that earn out assume.
Like lapses would be lower than what is actually occurred.
Right.
Yes, so sinisi earn out was based on.
A revenue retention target that was actually higher than what we had assumed in our valuation. So what's the release of this liability suggests is that the revenue retention did not meet the earn out requirement, but I'm very happy to say that when we look at overall client retention.
And revenue retention, we are right on track and we're very pleased with the results that we're seeing on then is consistent with our modeling another way of saying Thats need is I believed that our initial analysis, what we thought the value of the business was we were correct because that additional lump sum payout would have been condition.
No on something that was above what our modeling would have produced in so it's a nearly coming in on what we thought the devalued the business was and again I would give a lot of credit to Rene and her team for.
Successfully working through a very very large transaction. So thanks for the question Snake Yep. Thanks.
The next question will come from Ryan Krueger with KBW. Please go ahead.
Hi, Good morning, everyone right can you help us things a bit more about your dental expectations for the second half of beer and I guess more specifically I know youre not expecting it to be nearly as good as the first half, but I guess would you expect dental still be.
Favorable to your your normal expectations in the back half the year or.
What would you actually expected to be somewhat unfavorable because of some of the rebate.
Type of activity.
Ryan Great question, I am only laughing because I hadn't been to the dental office for six months I went two weeks ago for the first time F. go back tomorrow, So one way or another theyre going to extract there there their value from Dan at least so Amy you want to help us work through the profile of the the dental those yet right back your actions.
Yes.
And gets extended a little bit take you back a little bit what happened what we saw happened in second quarter.
April was was very low utilization a lot around the nation.
The provider offices, many of them, we're close and only providing emergency services. We saw that kick back up in May and then in June in some geographic areas. Some regions. We even saw what I would consider some pent up demand more procedures, some higher dollar procedures and even higher kind of.
Utilization than we would see on a normal full month in some regions of the country for June and so the wildcard here really is with sort of an unknown amount of virus activity an unknown I.
I would call it patient comfort with how and when they see care, particularly in those areas that are seeing a little bit more activity I think our assumption is the dental offices will stay open in the second half of the year. Our assumption also is that there will continue to be a little bit of pent up demand probably played through the rest of the year.
And if we're going to see a quarter, where we see.
Some of that pent up demand, we'll probably see that during third quarter. So third quarter is probably the one that I would point back to being.
Probably closer to what our seasonal.
Lower points are in a normal year does that help frame.
It does thank you and then Hey, Ryan one thing I'd add to that as our premium credits actually have a full impact in the third quarter and only had one month of impact in second quarter in one month of impact in fourth quarter. So that's going to play into the third quarter result, as well.
It can you.
Quantify how the magnitude of the the premium credit and the in network refund.
Well I think on a premium credits it isn't a 10% reduction and we didn't give you a premium on on the supplement page I'll, let Amy talk about the in network credits.
Yes so.
By magnitude basis that that premium credits are by far the larger thing that you'll see flowing through and that will go through our premium line and again as Deanna noted that'll be a full impact and all three months of third quarter. We saw a one month of that influencing it results in second quarter, and we'll see one month.
The that in fourth quarter, and again I'll, let you do the math against the the premium numbers that we put out there that the protective equipment that credit we're giving in terms of PPD for the dentists that is in order of magnitude much smaller than the premium credit in terms of how impact, but I do want to point out.
That will be full year, so that will be third quarter as well as fourth quarter and that impacts the claims line as opposed to the premium line. So much much smaller impact, but that'll be coming through different line.
During the one thing I'd say as I think like all medical offices, they're figuring this out and so we would anticipate over a period of time here that this gets sort of back to normal they've got the proper PPD people are taking appropriate precautions and so this is probably a two or three quarter anomaly and then we're right back to what I consider our.
Traditional run rates for procedures for the dental offices. So thanks for the questions.
Thank you.
The next question will come from Humphrey Lee with dialing in partners. Please go ahead.
Good morning, Thank for taking my questions just to follow on that thanks. So peaceful so in the supplemental think the that go into an addition premiums was 240 million in the second quarter can you give us to put down between dental and vision for for your fault block of business.
You can think about the to the 10% a premium credits.
Yeah.
This is 80 happy to jump in and answer that the breakdown on that is really I'm, probably think of dental as the vast majority of that so think of it as 90% to 95% of that vision is going to be significantly less.
Okay. That's helpful.
And then shifting gear.
In terms of PGTI.
Can you talk about your net flicks, the patient and the impact of the lower transaction fees I think 10 set in last quarter that.
The expectation is third quarter, we remain challenged and then hopefully fourth quarter will be back to normal is that still the expectation.
Kevin you on please take a sure when it comes to transaction fees. There were mostly talking about commercial real estate and so I think what you've seen so far this.
We're strong then if cobot started to hit transactions started to Wayne and they've continued to be below expectations for the our original expectations for the first half of the year. So just to give you. Some perspective transaction volume is down about 33% from 2019.
But we have started to see is that the markets are starting to talk a little bit people are finding ways of getting out and seeing properties. We're certainly seeing that on the commercial mortgage loan portfolio and then we're starting to see.
More transactions now the transactions done right now have typically been worked on prior to coven.
And we're still seeing a lot of price discovery going on between investors and sellers. So we hope that that starts to pick up as people are able to travel maybe a little bit more maybe able to physically inspect some of those properties or find ways to do that for a toy.
But right now I think we'd expect that third quarter will be lighter and then as we said hopefully in fourth quarter things will get back to more normal pace.
A follow up on his anyway.
Yes anyway to think about the impact. So you called out was 5 million lower relative to last year's second quarter, but should we kind of expect something that magnitude thoughtful per quarter, and then maybe a little bit better in fourth quarter.
Yes, so on sort of a normal run rate basis, I would think that we would see a little bit lighter in third quarter. So we're probably coming into the $3 million lighter in third quarter, and then hopefully back to normal enforced.
Okay.
Got it thanks, thanks, Thanks comfort.
The next question will come from Andrew Clay Grumman with Credit Suisse. Please go ahead.
Good morning.
With regard to your capital deployment, you indicated $802 billion for the year, just assuming the normal run rate of dividends that would leave you.
If you were to do a billion.
Close to $200 million to deploy.
What type of opportunities might be out there.
Yes.
You said that capital and what do you think the probability of using capital so buybacks might be and when might you do so this year.
Just tell me how the co thats going to go from here and I can respond to that question. This this is a really important question, Andrew and one that we talk about a lot. It's one of the reasons why we had the issuance of 500 million that.
Dan mentioned at such favorable terms is why we have been so aggressive in managing our expenses. We've maintained the dividend payout in spite of the fact gets above the 40% targeted range to to support shareholder support provide continuity. We do is the.
And I've said in her comments have over $800 million of authorized share buybacks still out there we have frequent conversations with the board.
And we'll look for the right way to go about deploying that remaining excess portion of the of the capital whether it's organic whether its.
If a property were to become extremely distressed in the marketplace M&A, maybe an option, but still we look at share buyback is is a good tool to provide good value for a long term shareholders. Dan I know if you have anything else she'd like to say, yes. It's a few comments obviously the math.
You did was correct that the low end, we basically have no additional external deployments assuming that we kept the dividend flat at the high end you're closer to 200 million.
I'd say for the next quarter, we're going to continue to stay on the sidelines and will ultimately probably start having more discussions on this as we get towards the back half of that are the bat quarter last quarter of the share into 2021 really what we want to see is more clarity and even though we have some.
Additional clarity given one quarter.
I've experienced behind us I'd say relative to the path forward, especially around the pandemic I'm not sure we have any more clarity sitting here today than we did a a quarter ago and so again like we said the debt issuance is is that help but we obviously just didnt do the debt issuance the turnaround and buyback shares its there to really.
With us in case things start to deteriorate more than we are and we really have to see much more clarity until we start to deploy unless an opportunistic M&A came to us that we really wanted to look at as we've talked about M&A. Obviously, the pace of activity is lower but there could be a small number that had.
Thats started discussions prior to this crisis that if those came to fruition that could be another opportunity as we go into fourth quarter into 2021.
Andrew Apollo, Yes, sure and that makes a lot of sense, so with regard to life insurance.
Your your sensitivity went from as you said earlier $20 million per 100000 lives down to $10 million what was it about your what is it about your insured population.
Differs from what you were thinking three four months ago, allowing you to change up this sensitivity geography wise age wise or what have you.
Yep.
Take the first stab assistance it does impact the number of artist different businesses beyond just U.S. I asked the now see if anyone has anything.
To add to that you know obviously when we were sitting here a quarter ago, we had to take a gas with absolutely no experience about how the total population incidence of coal the das would translate into our insured population and again, we did the best guess based on our analysis as far as.
Third party analysis that had been developed but again, we had no real experience to look at you know obviously now three months later, it's not totally credible experience that we've seen but we do have.
A lot of claims about a 150 on on the insurance side that has come through during the quarter that we're better able to just look at the nature of those claims whether it be age whether it be face amounts whether it be size of the annuity product and we're just better able to update how that translation.
Happens between the general population experience and the experience of our insured population and so that did cause us to cut in half our sensitivity.
I think the good news of that is probably the estimated number of death is probably more than doubled our impact of that is less is cut in half and so ultimately feel good about the how we are able to manage that going forward I do want to make sure you're aware that that does consider all life and disability claims in U.S. I asked.
It's also offset by benefits that we see in our annuity businesses. Both here in the U.S. and outside of the U.S., but it doesn't contemplate any indirect claim impacts due to office closures are lower elective procedures on our specialty benefit business. So I'll see if.
Famy has anything to add but I also think that rule of thumb held pretty close as we looked at our second quarter experience.
No Deanna you've covered it really well I think that that you've covered that it's an aggregate number that kind of crosses multiple businesses and I think the good news. There is we're seeing good protective value and we do are certainly our group life block is working age population fair relatively low again, given the market.
In fairly low face amount and so you have to have quite a few claim for those to add up significantly our individual life is holding up well in terms of protecting value of the underwriting we view and the types of business. We put on the books keep in mind, we have probably a disproportionate amount of working age population even.
In our individual life insurance coverage because of our business market focus thanks, Jamie. Thanks, Deanna. Thanks, Andrew for the question next.
The next question will come from John Barnidge with Piper Sandler. Please go ahead.
Thank you.
I want to go back to dental consultant, obviously, the first half the year a glow claim activity because people are going or couldn't go there could be a catch up in the third quarter.
I am more thinking about renewal pricing.
As you prepare for open enrollment season into 2021, because obviously, there's a cohort of people.
Our going into the Dennis at all this year.
That probably that pent up issues that are probably more serious and what do you have to go back into Kurt.
Good point out.
How do you square the lack of activities in 2020 with pricing in renewal and potential pent up demand for 21.
Please.
Yes, John these are good questions, you're asking and so one is I think we've been doing is sort of refreshing. Our claims studies with respect to dental im looking at them a little bit more closely than we more frequently than we have in the past what we know is that keep in mind with as footprint that is.
Primarily for our group benefits business a lot of smaller cases, some of that big push towards annual enrollment is not as market as you'd see in some of the larger Keith business the spread out amongst 80 or 90000 of those smaller cases, and so what we're watching and what we are seeing is a little bit more.
Usage on what we would consider kind of higher dollar procedures. If that continues then we'll watch and continue to price for what we think could happen in 2000 2021 now keep in mind Theres Some natural plan.
Provision that kind of dictate a little bit how many.
How many dental coverage is you can see any given year or procedures. You can have any given year, you're going to have some one preventative care visited six two in 12 and those are going to provide some natural protection, but more importantly, there are restart for the next year as we kind of restart our pricing excellent.
Thank you Jeff follow up John.
Yes sure.
How do you have changes in the health and rate environment kind of changed how you're approaching the upcoming actuarial assumption.
Yes, Deanna you want to.
Walk us through that yeah. So obviously in a volatile environment like this we <unk> we have to think of this over the long term, which rather than adjusting to short term volatility and again, we're trying to predict what 10 year treasuries and spreads are going to be 10 years.
I'm now and obviously you can't overreact to kind of pressure that we have but having said that.
Obviously, the pressure that were and I'm in a sustained low interest rate environment is something that we have to contemplate as we go through our third quarter process and also we have to look not just at interest rates, but all of the other policyholder, an actuarial behavior assumptions that we have and Matt.
We have not made any decisions at this time, we continue to evaluate it based on our own analysis also take into account other people's thoughts on on that trajectory as well, but I would tell you as we sit here and we manage capital and think about capital scenarios.
We are incorporating impact if we do make a reduction to that interest rate assumption and how that would flow through our capital position. So again no decisions have been made but I think we're being prudent as we analyze the different capital scenarios to make sure that we feel good about our capital position.
John for the questions excellent. Thank you.
The next question will come from Erik bass with Autonomous Research. Please go ahead.
Hi, Thank you have a couple of questions around the expense savings.
First you have a new full year target for the corporate loss and then that the business level is the goal is to still be able to achieve the target margins you provided at the beginning of the year. Despite the revenue pressures, yes. So you know and I'm a throw this study in a quick I just want to go on the record with with regards to our approach to expenses and you can.
Go back for as long as I can every member and I've been here a long time, we have always looked at the revenue that we're able to generate and then adjust our expenses accordingly, and there are certain points in a volatile economy, where there's reviews inflection points, where you have to go above and beyond anew.
You are trying to anticipate deanna outline very carefully for you in her prepared comments those areas that will likely bounce back and those that we'll continue to manage in accordance to the business, but one of our objectives has been to stay is closely aligned with the margin expectations that we framed with you frame for.
You previously and not making any adjustments to those but it's one of those.
Approaches that we've always taken that I would describe as surgical as opposed to across the board and we have not had any broad base significant reductions in force, which is why we're still able to maintain very strong customer service scores get the worked on while at the same time adjust these expenses Accordingly, Dan you want to provide some additional insight.
Yeah. So first take your quick question on our corporate unresolved and what I would say, there's there's always volatility in that line of business, but as I think about the second half of the year, we're going to continue to benefit from the expense management efforts that we have underway and how that flows through the corporate results offsetting that partially that we'll see some.
Added on debt expense due to our recent issue and that what I would say is if you average the first quarter and the second quarter I think thats a good proxy for the second half of the year relative to corporate I'm moving on to expenses I think Dan made some great comments, and obviously I frame that within the prepared.
His remarks, but let me just try to give you a little bit more color and I think your comment on margins probably more aligned so how we think about 2021 I think in 2020, obviously the efforts that we made we're we're really across all of the business is pretty indiscriminate of what revenue pressures.
Our seen in so we didnt, how Amy because she's having good dental claims experience that she can spend a lot of money and on the flip side, we didnt tell a lease that's being pressured by FX that he had to take additional cuts and so when I looked at 75 million that we talked about for the second quarter alone are the 250 that.
We're talking about for the full year and I think about each of the businesses. The per cent change is pretty similar for all of the businesses and so again your models May show, one business or another but when I look at it I'd say the per cents reduction is in a pretty narrow range across all of the.
Businesses as we think about 2021, I think thats when the more comments around margins come into play because again this was tightening our belts given them die or meant that we're in and basically looking at all of our expense items. Some that naturally came down such as travel, but also being very very disciplined on higher.
Irene and staffing costs and some of that's going to start to normalize as we go into 2021.
For example, our incentive compensations all reset at the beginning of the gearing so even though that helping our expense base. This year those will again kind of come back to a normal level.
And then other items I'd say, we'll still be lower than what we would have anticipated pre covance, but we will see some gradual increase as we move forward on travel could be an example of that staffing salary cost could be an example of that as well and so I think that's when you start to see us making sure that are.
Fence levels are leading to our targeted margin.
By business as we as we move into 2021, hopefully that helps.
Yes, that's very helpful. Thank you.
Then if I could ask one follow up just on our is the I think your guidance implies expecting organic growth at the low end of the 1% to 3% target range and I assume that's just for 2020.
That kind of implies breakeven inflows for the remainder of the year. So it's just hoping you could talk a bit more about the dynamics there and how you see both sales activity in recurring deposits trending over the next few quarters.
You've captured that well right where comments please.
Okay.
So Eric when we think about net cash flow for 2020, you're correct that we do believe that we will come in at the low end as a 1% to 3%.
Beginning of year average account values.
And it's being driven by several things first off when you look at the sales environment that we're currently in.
Due to pandemic, we do see better sales are pressured we're seeing some recovery in the pipeline in June which is really good news.
And we're also seeing a portion of that the decrease in sales being offset by an improved level of contract termination or there is kind of that to two sides of the same claim there.
From a recurring deposit perspective, I think it thing to note there is that.
We do have a read a level of resilience in our block of business because as the nature of industries that our customers are engaged with when we show that to you in the slides.
Weve provided.
We are seeing pressures, but they are manageable. So if you look at recurring deposits, we see about a 1.5% increase in recurring deposits.
Over second quarter, 2019, anything drill down a little bit deeper what you'll see is we are seeing a decline in the number of deferring participants we saw the trough that decline in May in June we saw a little bit of an uptick in the number.
[music].
Participants that we're making deferrals.
The deferral rate throughout this whole.
Time period has remained steady.
From 2019, so that's good.
And we also have seen about only 1% of employers have either reduced or eliminated their match so they're.
Applying a great deal of discipline in how the approaching their retirement plans in understanding the value that that brings to their mark to their workforce.
Turning very quickly to participant withdrawal.
In the last earnings call I framed for you that.
To put a little bit perspective here in the 2008 2009 prices, we saw participant withdrawals reach about 11%.
And well certainly participant withdrawals have been pressured we're not reaching that same level in second quarter.
With that said, though we did see about 2% of participant take hold good related withdrawals.
But I would remind you that those are going to be low battle. It typically low balances and so if you expressed.
As a proof of the withdrawals that we see as a percent of beginning here account values. It's about <unk>, 0.3%. So all of those things taken into consideration.
Does lead us to the guidance of 1% to 3% with 1% being what we think we're going to come at the lower end to that range. All this is is contingent upon market performance and what happens with the manner in a pandemic air hopefully that additional detail was helpful. Thank you yes. Thank you.
The final question is from Tom Gallagher with Evercore. Please go ahead.
Hi, just follow up question on our I see.
Related to also retention. So your if I look at the planned breakout by number of lives to thousand in larger lives plans declined by 16 sequentially. That's the biggest drop I can remember in quite some time is that just normal wells related.
Question that you'd been expecting or.
Would you would you call out anything else in particular, that's happened in the large and today beer.
Of the market.
You want to identify there absolutely so Tom Thank you for that question.
I'd remind you that when you're looking at the number plans in the supplement that's going to exclude the IR keep off a business.
So if you look at the number plan will total you'll see that are our plan count is down.
Lightly from.
From second quarter 2019 in the primary driver that is that sales are down and so when you. We simply don't have that sales engine, putting new plans on the book at the same pace that it was.
When we look at the large planned marketing in particular.
We're actually very pleased with the performance of our large plan block of business.
We're seeing really good pipeline, we saw a really strong sales you saw that come through in 2019 in first orders this year and retention remains strong.
So it's really reflecting sales.
But I guess, just a follow up on that.
I presume those plans are not going away deep would you have lost 16 plans quarter like versus the ended the first quarter and as competition somehow intensifying I would've expected.
Trent movement, among carriers to actually be down.
So I was a little surprised to see that many plans and that more and that large case market. A lot of that is we're on the losing in of some merger and acquisition, where there was even larger company bought it we don't have that broken out with a lot more detailed but each one of those plans are priced individually, they're they're not priced in.
Again, so if there is a lapse and we lost it.
There are some instances, where we perhaps would have wanted to retain it because of profitability expectations, but more times than not it would've been a plan that.
Was acquired by is a much larger plan and the plan services went to the acquirers record keepers opposed to principle I do think in this environment. There has been it is it is increasingly.
Challenging to to have those sorts of discussions when you're on the are being on the bought into that front anything else you want to add I think that that's very well said, we did see maybe a little bit of volatility in the larger find market, but our model is working really well and we see nothing that gives us concern moving forward.
Tom do you have a quick follow up.
Yes, Thanks, Stan just just a quick one on individual disability benefit ratio.
Being elevated and I think you called out and 19 billion on favorable earnings issue.
What's your level of conviction that this it won't recur and ill.
Yes that because.
I would prior economic cycles, what we've seen unemployment go up lot you have seen some elevated disability claims. So do you believe this is really a nonrecurring issue or where are you still kind of waiting to see how this plays out.
We think it'd be nonreoccurring, but and you want to provide additional sites sure Tom Thanks for the question.
So a couple of thoughts go into this I think I think number one in 2019, we were really seeing some good really good claims performance for our individual disability block and so.
So just given the natural claims volatility of the segment seeing a little bit of a blip in a quarter is not totally unexpected, especially on kind of an incident basis. So the other thing I would tell you is that.
Typically if we were seeing something that was going to be a disability.
Macroeconomic conditions, starting to affect disability, we would've seen in emerging in group disability as well so to see it kind of emerge a little bit differently in individual disability has given us a little bit of comfort that we're probably seeing something thats closer to a volatility issue and not necessarily a precursor to what we might see in the future now.
Even having said all that we've talked a lot today on the call about uncertainty we will continue to watch this block if we see incidents emerge in areas or pattern that indicate to us. It's a macro kind of a leading macro we'll certainly let you know that Tom thanks for the questions appreciate it.
We have reached the end of our Q1 day session Mr., how senior closing comments. Please.
Were slightly over the hour here, but all saw be quick in the first thing I want to say is we feel is much conviction today as ever about the diversified integrated business model the fees the spread and the risk businesses, we like what portfolio. We have will continue to build upon it although we didn't get any questions asked today These international Mark.
They are volatile, but they will enjoy long term growth, it's where the middle class is coming and so again, we feel very good about the international I think you saw firsthand how resilient small to medium size employers are hopefully you had a chance to dig in through some of the detail in the slide deck because again it is a good proof point that they are.
Were very adapting to the marketplace.
Expense management philosophy is to be smart thoughtful aligning expenses in revenues were continuing to make that a priority. The IR t. integration is on track and we feel good about its ability to provide long term value I feel bad for Tim you didn't get ask questions about the great investment performance form PGTI to back to back.
Orders of plus $7 billion and sales in our mutual fund franchise, which is in this day an agent active strategies that speaks volumes about the durability and I'd also be remiss. So I didnt call out the 33 year anniversary for spectrum asset management, and they've done a great job in that preferred space, adding.
A lot of value and Mark leave and his team have just done a superb job leading that that franchise. So I wish I could say, we'd come up so you in person, but I'm afraid is going to be on video conference, but we very much look forward any follow ups. There on the call today have a great day. 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 August 4th Twentytwenty two Onesix nine Joel Sixeight is the access code for the replay the number to dial for the replay of eight high 585 nine 205.
Yes, you S and Canadian callers or forms you a 45373 406 international callers. Thank you for participating you may all disconnect.
[music].