Q3 2020 Principal Financial Group Inc Earnings Call
Good morning, and welcome to the principal financial group third quarter Twentytwenty Financial result 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 simply press star and the number one on your telephone keypad [laughter], we would ask that you be respectful.
The mothers 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 call over to John Egan, Vice President of Investor Relations.
Thank you and good morning, welcome to principal financial group's third quarter 2020 conference call as always materials related to todays call are available on our website at principal dot Com backslash investor.
Similar to last quarter, we posted an additional slide deck on our website with details of our U.S. investment portfolio.
During the reading of the Safe Harbor provision CEO, Dan how soon and CFO Deanna Strable will deliver some prepared remarks then.
Then we will open up the call for questions.
Well this is available for the QNX session include Bernie Shaw retirement income solutions, Tim Dunbar Global asset management Luis.
Luis Valdes principal international and Amy Frederick U.S. insurance solutions. Some of the comments made during this conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act. The company does not revise or update them to reflect new information.
Subsequent events or changes in strategy risk and uncertainties that could cause actual results to differ materially from those expressed or implied 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 us GAAP financial measures may be found in our earnings release financial supplement and slide presentation.
We would like to make you aware of two upcoming investor events, we're changing the timing of our outlook call from December to February 25th. Additionally, we plan to host our 2021 Investor Day on June 15th next year.
More details of both events will be shared in the future Dan Thanks, John and welcome to everyone on the call I Hope you and your family or staying healthy him well. This morning, I'll provide an update on how principle continues to respond to cold at 19 and its impact on our business I will discuss key performance highlights for the third quarter, our continued strong financial position.
And how we are well positioned for long term growth with the right strategies in place Deanna will follow with our third quarter financial results, including the financial impacts from our annual actuarial assumption review in coated details of our capital and liquidity position and an update on our investment portfolio safety of our employees and customers remains.
Top priority, while most of our employees continue to effectively work remotely we're gradually welcoming some back into our offices around the world. We are extremely pleased on how effective and flexible our employees have been in this remote work environment, while maintaining excellent customer service.
Investments in technology digital solutions over the last several years continues to pay off and allow for seamless transition cobalt has had an impact on the retirement and group benefits landscape with both employers and employees recognizing the need for benefits to protect the health and well being a bold individuals and their families. This has magnified the role employer Bennett.
Play in attracting and retaining top talent, especially within small to medium sized business community last quarter I mentioned that the impact cobot is having on our customers was less about the size of the business and more about the industry. They operate in.
This continues to be true, we remain well diversified by geography and industry and we're less exposed to industries. Most impacted the pandemic has certainly created some unique opportunities and challenges for principal our integrated and diversified business model remains resilient I'm confident that we're on the right businesses with the right teams in place and we will.
Continue to make investments to create long term shareholder value.
Moving to the third quarter highlights on slide four we reported non-GAAP operating earnings of $235 million.
Excluding the impacts of the actuarial assumption review, another significant variances, which deanna will discuss non-GAAP operating earnings of $417 million increased a strong 10% compared to a year ago quarter.
The increase was driven by higher revenue from increased a whim and disciplined expense management, partially offset by foreign currency headwinds.
At the end of the third quarter, we remain well capitalized with $3.4 billion in available cash and liquid assets and $2.6 billion of excess and available capital. We are positioned to execute on the right opportunities that will enable principle to grow and create long term shareholder value compared to the second quarter total company a whim increased nearly 30.
The billion dollars or 4% to $731 billion at the end of the third quarter. This increase was driven by both positive net cash flow and favorable market performance.
We closed the quarter with a record PGTI managed to you with a $468 billion and record PGTI sourced AUM of $226 billion. This continues to highlight the strength of our investment performance and are in demand products and solutions.
OEM on our China joint venture, which is not included in our reported AUM declined 16% during the quarter to $120 billion. This decline was primarily due to the industry trends in China to move investments out of money market funds in light of the low interest rate environment.
Through the first nine months of the year total company net cash flow was a positive $11 billion, including $2 billion in the third quarter on a trailing 12 month basis net cash flow of $18 billion increased from $7 billion in the year ago period principal international generate $1.8 billion of net cash flow and markets.
48 consecutive positive quarter, driven by positive flows in Brazil, Southeast Asia, Chile in Hong Kong. This is an extraordinary feat given the significant macro headwinds in emerging markets.
Yes spread reported net cash flow of $500 million due in part to another strong quarter of opportunistic MTN issuances I asked fee had negative $1.8 billion of net cash flow in the quarter, primarily due to continued kobin hardship withdrawals lower sales and pressure on growth in recurring deposits. This also went.
Acted PGTI managed net cash flows where we managed a portion of the retirement assets PJ source net cash flow was a positive $1 billion driven by our diversified products that continue to have strong performance as well as multiple distribution channels and client types. Our investment performance remains strong at quarter end, 73% of principal.
Funds Etfs separate accounts and collective investment trust were above median for the one year, 77% above median for three year, 76% were above median for five year and 91% above median for 10 years. Additionally for Morningstar rated funds, 74% of the funds level a UN had a four.
Or five star rating. This continued strong performance positions us well to attract retain assets going forward combined with positive net cash flow. This is a testament to the great work. Our teams have been doing to create in demand products and leverage our digital investments I'll now share some additional execution and business highlights starting with the integration.
Of the IR team business. Despite working remotely our teams have successfully started to migrate the core IR team retirement business to our platform. The migration of the retirement plans will continue through the summer of 2021 importantly, the strategic and cultural fit are confirmed and showing benefits already the revenue and expense synergies are also confirmed.
Though delayed with the expense synergies expected to be 50% higher than originally modeled these benefits will help mitigate the impact from the reduction in the interest on excess reserve or I or we are rate on deposit revenue.
These financial benefits will start to emerge after the transition services agreement Unwinds in the summer of 2021, our increased scale and access to the consultant and large market channels have doubled the volumes have created pipeline in the large plans segment. This pipeline is coming from distribution channels. We haven't previously had access to the combined platform we've been.
Old offers enhanced capabilities for not only our new high our key customers, but also our existing and prospective clients as well we are extremely excited about the IR tea business and the benefits. It will provide throughout the organization and all of its segments small medium and large planned markets from a digital perspective, our principal mobile App remains a top rated app in the retirement in.
Industry with more ratings and actionable feedback than our competitors.
We also launched simply retirement by principal a new all digital four one k. solution that helps small business owners and their financial professionals build retirement benefit programs in a matter of just a few hours simply retirement features competitive pricing our industry, leading digital onboarding experience and tools that make it easy to administer an individual.
We've seen continued adoption of our term like digital self service tool principal life online one of the first fully digital experiences in the industry. Since January we've had 47000 applicants utilize this tool by leveraging our digital application tools and investments in underwriting automation about a third of our underwriting.
Approvals can be completed with less than 10 minutes of underwriting time in Chile Cuprum recorded its highest net transfer rate of new customers since our acquisition of Cuprum in 2013, the new customer growth is driven by Cooper is easy to use digital solutions as well as our investments in direct to consumer and cloud capabilities, all of which have helped make our transaction Sip.
Well for our customers. We've enjoyed some noteworthy third party recognition during the third quarter as well and our global asset management franchise. We received recognition for our SG efforts from the United Nations principles for responsible investing or UN right Pete.
PJ I received an a plus overall approach rating and principal real estate investors received an a plus rating for the fourth consecutive year. Both the highest ranked awarded principle is recognized by financial advisor I accused service awards as a top three record keeper for an excellent advisor experience.
You asked news and well report again named principle to this list of top life insurance companies and see net name principle, the best overall life insurance company for 2020.
In Pi Brazilprev was recognized by Easter you did narrow magazine as the best insurance company and financial sustainability innovation quality and social responsibility. They have been performing an annual analysis for the last 16 years before I turn the call over to Deanna I'd be remiss, if I didn't recognize the upcoming retirements of Tim Dunbar jewelry along.
Now I'd like to thank Tim and Julia for their unwavering commitment to principal over the last 35 years. They have been tremendous individuals leaders and professionals over the years and our organization would not be the same place today without them.
I along with so many others will miss them personally and professionally we wish you both the best in your well deserved retirement.
That said, Pat Holter, and Ken Mccullum are in place to now carry the torch as we continue our journey as an ever evolving and growing global financial services organization Deanna.
Thanks, Dan Good morning to everyone on the call. This morning, I'll discuss the key contributors to our financial performance for the quarter, including details of our actuarial assumption review impacts from Cove, Ed our current financial position and details of our investment portfolio.
It continues to impact where and how we do business and we've included additional details of the impacts in our conference call presentation again this quarter as well.
While uncertainty remains on how the impacts play out over the next year. So many of the metrics for tracking continue to trend better than we expected at the onset of the pandemic third.
Third quarter net income attributable to principle of $236 million included net realized capital gains of $2 million with manageable credit losses of $17 million reported net income reflects a negative 187 million dollar impact from the assumption review and other significant.
Variances.
We reported $235 million of non-GAAP operating earnings in the third quarter or 85 cents per diluted share excluding the impacts of the assumption review and other significant variances non-GAAP operating earnings of $417 million or $1.51 per diluted share increased 10.
Per cent and 12%, respectively compared to the third quarter of 2019.
As shown on slide four we had several significant variances during the third quarter. These had a net negative impact to reported non-GAAP operating earnings of $233 million pre tax $182 million after tax and 66 cents per diluted share.
Pre tax impacts include Ed.
And that negative 142 million dollar impact as a result of the assumption review, primarily due to lowering our interest rate assumptions.
Net negative 48 million dollar impact from Covidien related claims and other impacts in our RF and U.S.I.S. businesses.
A negative 17 million dollar impact in our ASV from Archie integration costs and negative 14 million dollar impact from lower than expected variable investment income and specialty benefits individual life and principal international.
And a negative 12 million dollar impact and principal international from lower than expected and high performance in Latin America, and lower than expected inflation, primarily in Brazil.
Slide seven and eight provide additional details of the significant variances by business unit and income statement line item.
Looking back significant variances negatively impacted third quarter 2019 reported non-GAAP operating earnings by $41 million pretax $34 million after tax and 12 cents per diluted share.
This year's assumption review was primarily impacted by economic and experience assumption changes.
The most significant impact was the result of updating our interest rate assumptions.
We lowered our long term 10 year treasury rate assumption by 75 basis points to 3.25%.
In addition, the starting point drop more than 130 basis points from this time last year experienced assumption changes primarily included updates and RSV and individual life.
Individual life had an unfavorable impact from updated mortality and premium assumptions.
This was partially offset by a favorable impact in our ASV from.
From updated mortality and withdraw assumptions and our variable annuity business.
As a reminder, the secure act changed the required minimum distribution eight from 70 and a half to 72 years of age, meaning I knew it hence can take their withdrawals later.
We expect these changes will decrease pre tax operating earnings in individual life by $4 million to $5 million per quarter and have an immaterial impact and the other business units.
We'll be finalizing statutory results during the fourth quarter, including the impact of these updated assumptions as well as our annual asset adequacy testing, we expect this capital impact to be manageable.
Turning to macroeconomic factors in the third quarter. The S&P 500 index increased more than 8% and the daily average increased 13% compared to the second quarter and 12% from the year ago quarter benefiting revenue you Adam.
And account value growth and RFP MPG.
Moving to foreign exchange rates average rates improved during the quarter, but we continue to face headwinds compared to a year ago impacts the third quarter pre tax operating earnings included a positive $5 million compared to second quarter 2020, a negative $16 million compared to third quarter 2019, and a negative.
$53 million on a trailing 12 month basis.
For the business units third quarter results, excluding significant variances were largely in line or better than expectations, given the current macroeconomic environment.
The legacy business and our highest fee continues to perform well given the current operating environment, excluding significant variances the margin for the legacy business was nearly 35% in the third quarter and reflects strong expense management and equity market Tailwinds.
Slides nine and 10 provide details of the covenant related financial impacts we've experienced in the third quarter as well as updated thoughts on potential impacts the pandemic could have on our business and our results in the future.
Third quarter pre tax operating earnings were impacted by a net negative $48 million, including a negative 42 million dollar impact in specialty benefits, primarily from a 10% premium credit for our dental customers claims in group life and group disability as well as unfavorable dental and vision claims from pent up demand that partially.
Offset some of the positive impact from the first half of the year.
A negative $8 million in RSP from waived fees for participant hardship withdraws.
And a negative 2 million dollar impact from claims in individual life.
These impacts were partially offset by a $5 million benefit from favorable mortality and our highest spread.
In total our third quarter direct co led mortality and morbidity impacts and specialty benefits individual life, and our highest spread netted to a negative $3 million. After tax impact was slightly more than 80000 covered das reported in the U.S. during the quarter.
Our third quarter impact was lower than our cobot sensitivity of a 10 million dollar after tax impact to earnings for every 100000 U.S. covered desk, primarily due to lower then assume claims and individual life.
We believe this was normal volatility and are still comfortable with our sensitivity.
We're continuing to monitor several other key indicators to gauge the potential future financial impacts from Covance and the related market Volatilities.
And the retirement business the trends we saw in second quarter for both plan sponsor and participate behavior continued in the third quarter.
Participant withdraws remained elevated during the quarter, partially due to $1 billion of covered related withdraws, which we weigh fees on through September. We continue to expect full year total participant withdraws to be approximately 11% of beginning of year account value about one percentage point higher than we typically see.
While we continue to see growth in recurring deposits compared to a year ago growth is muted as participants, making deferrals remain lower due to layoffs and furloughs.
And group benefits as I discussed on last quarter's call. The number of lives covered under our existing plans as a good indicator of employer behavior.
Overall covered lives decreased 1.2% during the quarter, we saw growth in September in certain industries and regions a sign of recovery for some sectors and we're seeing continued improvement so far in October.
And individual life, while sales are down overall due to our concentration in the business market. We continue to see an increased interest in term life insurance application volume is up nearly 140% compared to a year ago due to increased awareness of mortality and our enhanced digital capabilities and digital distribution.
And principal International Chile pass the line July, allowing participants to take hold and hardship withdraws. This negatively impacted our AUM levels by $1.4 billion.
To mitigate some of these pressures we have a strong history of effectively managing our expenses in line with revenue during times of uncertainty and market volatility.
Compared to our expectations at the beginning of the year Weve reduced expenses, nearly $200 million year to date, including more than $100 million in the third quarter.
This is spread across all businesses and contributing to resilient margins despite revenue pressures.
For full year 2020, we continue to expect our actions will reduce expenses by approximately $250 million relative to our expectations at the beginning of the year.
As a reminder, fourth quarter compensation and other expenses are typically 7% to 10% higher than other quarters due to seasonality of certain expenses like marketing and IP.
We expect to be at or below this range and fourth quarter. This year.
Turning to capital and liquidity on slide 11, our financial position remains strong and improved from last quarter. We ended the quarter with $3.4 billion of total company available cash and liquid assets and we had $2.6 billion of access and available capital, including $1.6 billion at the holding company.
Double our target of $800 million to cover the next 12 months of obligations.
$100 million of available cash in our subsidiaries and $480 million in excess of our targeted 400% risk based capital ratio at the end of the quarter estimated to be 431%. The RBC ratio remains higher than our target due to uncertainty in the timing and impact of credit draft in credit loss.
We continue to expect the RBC ratio will trend down to our targeted 400% overtime, our non-GAAP debt to capital leverage ratio. Excluding AOCI is low at 24%. Our next debt maturity of $300 million isn't until 2022, and we have a well space laddered debt maturity schedule into the.
Feature.
Despite the pressures of the current environment, we remain in one of the strongest financial positions in our company's history.
We have the financial flexibility and discipline needed to Opportunistically deploy capital and manage through this time of economic uncertainty as shown on slide 12, we deployed $154 million of capital in the third quarter for common stock dividends, we plan to restart share repurchases either in the fourth quarter or the first quarter of 2021.
While uncertainty remains we continue to be in a strong financial position, we're starting to have enhanced clarity and stability in the macro environment and the range of possible outcomes is narrowing we have $850 million remaining on our current share repurchase authorization.
Last night, we announced a 56 cents common stock dividend payable in the fourth quarter unchanged from the third quarter and our dividend yield is approximately 5%.
As shown on slide 13, our investment portfolio remains high quality diversified and well position and importantly, our investment strategy hasn't changed.
A few takeaways at the total company we are in a $3.7 billion net unrealized gain position. This include the $6.5 billion pretax net unrealized gain in our U.S. fixed maturity portfolio, which increased another $1 billion during the third quarter as spreads continued to tighten.
The U.S. commercial mortgage loan portfolio average loan to value of 50% and average debt service coverage ratio of 2.6 times did not change from the second quarter.
We have a diverse and manageable exposure to other alternatives and high risk factors and importantly, our liabilities. Our long term, we have disciplined asset liability management and we aren't for sellers.
Year to date, we've experienced a $165 million of credit draft and credit losses with $50 million in the third quarter.
Our outlook for 2020 continues to improve and we're now expecting 200 million to $300 million of dress and losses for the full year. This.
This has improved from the 300 million to $500 million range estimated on the second quarter call and $400 million to $800 million that we estimated at the start of the crisis using.
Using the global financial crisis as a guide we're expecting additional credit draft in credit losses to emerge beyond 2020 economic.
Economic impacts from the pandemic have been delayed due in part to the large an unprecedented global government fiscal and monetary stimulus programs. We're currently estimating approximately $400 million of credit drafts and credit losses. In 2021, we continue to monitor the situation closely and we'll provide updates on future calls.
Yes.
In closing comment and the related market volatility are certainly impacting our business our employees and our customers, 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 this crisis.
As John mentioned at the start of the call. We will host our 2021 outlook call on February 20, Fiveth and we're looking forward to connecting with many of you at our 2021 Investor Day in June next year.
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 Thats star one for any questions. We'll pause for just a moment to compile the acuity roster.
The first question will come from Humphrey Lee with Dowling and partners. Please go ahead.
Good morning, and thank you for taking my questions.
First question for Deanna, you mentioned about you plan to resume share repurchase either in the fourth quarter of this year or first quarter of next year I guess like what factors do you need to see before you decide to do it this incidents in the fourth quarter into the first quarter.
Yes. Please yes, thanks Humphrey for the question.
As you mentioned, we did say in the prepared remarks that we continue to be in a very strong capital position and we have every quarter gotten increased clarity on the range of potential path forward with reduce expected impact.
I'm dressed and impairments.
As I as you said, we mentioned that will either restart share buybacks in the fourth quarter or first quarter I'd say based on what we know today I think there is definitely a path to additional capital deployment in fourth quarter.
But I also think you can agree that uncertainty exists whether that be uncertainty around market volatility. Obviously, what we saw yesterday showed some pretty pretty significant pressure uncertainty around the stimulus package and how that may impact some of our businesses as well as uncertainty around cobot impacts and how those could play out and we want to be.
Prudent and not ignore some of that volatility that is out there, but I think bottom line, we have a strong capital position and all all deployment options are currently on the table on for Jeff a follow up yes. So clearly for the third quarter expense was a good story with the expense efficiency continues very strong.
I think there is some amount of that may not recur and even for the full quarter, there seems to be a little bit less benefits than the third quarter.
Can you talk about like what level the.
Expenses to expense savings will be sustainable.
And then, especially how we think about that.
And as you kind of humorous from depend dynamic.
Some of the efficiency could be could be.
Okay.
Forward as opposed to something maybe coming back.
Given just some of the expenses being suspended expenses.
Humphrey I'll throw this deanna quickly, but I just want to be on the record to remind you. We've had a history of aligning our expenses with revenues consistently I think the fact that we could identify $250 million. This year was exemplary and a good indication of the team is is really on board of doing the right thing.
Having said that we are going to work and we've made good investments our digital transformation is still very much intact, we're transitioning the.
The Iraqi business over and so we fully intend to have a similar approach to 2021 I'll throw it to Deanna provides more detail on freight what what probably would help is if I give you a little bit of color on the 2020 expense actions, and then weve and fourth quarter as well as 2021.
So again, we continue to reiterate as we did last quarter that we expect about $250 million from what we anticipated coming into the year and we've experienced probably about $200 million of that materialize through the end of the third quarter that does ignore any adjustments to variable expenses that naturally flow.
With revenue changes such as investment management fees bonus pools and the like.
We think about a half of that reduction is what we would call staff related expenses. So that can come from lower incentive comp lower benefits on reduced hiring as well as salary actions that we took earlier in the year and the remainder is half is non staff related so thats, where your travel.
Contracting consulting spend advertising spend would come in.
If you take that we had 200 million year to date 250, you're correct that some of that third quarter. We think will be the high point of that expense management, but we actually do you still see that some of this persist into fourth quarter as well as into 2021.
Just a reminder, that we do have seasonality that always causes fourth quarter expenses to be higher and we do think that will be somewhat muted, but we still expect that to be.
So that seasonality as we go into fourth quarter.
As we think about 2021, and I think about what is causing and leading to the expense management picture that we have you are correct. Some things will reset probably the perfect examples of those incentive compensation.
And salary levels, but other items like staffing and travel will increase but at a lower level than what we would have anticipated pre crisis and so if I if I kind of do the the exercise the same way I calculated the 250, which is how do we think 2021 expenses will look relative to what.
We would have thought the pandemic thereabout down about a $100 million from what we would have expected so that implies that about 40% of that 50.
Remains as we go into 2021 and that some items will reset at the beginning of the year and others will trend up as we go throughout the year.
This is an early look at expenses for 2021, and obviously, we've had a lot of volatility in revenue.
Over the last six months. So we'll continue to evaluate well continue to refine and our ultimate aim is to align expenses with revenue and ultimate we generate the targeted margins that we've shared with you on the investors. Thanks, Yes.
Yes, Thanks Humphrey for the questions that is helpful. Thanks.
The next question will come from John Barnidge with Piper Sandler. Please go ahead.
Thank you our sales volume year over year in specialty benefits actually got worse sequentially can you provide any color on that is it small business related social distancing related how do you think of it going forward.
Great question, and then ill.
In the midst of a global pandemic, we've certainly seen sales across our small and medium sized business get impacted both our I asked as well as SPD, but Amy has got some additional insights and thoughts maybe about the future.
John Good to get the question from you.
I think the way to think about it is less about sort of how we how our sales process work and more about just overall people's decision, making about employers putting in new benefit. So what I would say is when I look at that sales volume moving down people are interested what we're hearing from small employers and.
Mid size and large alike is they're interested in protection coverages.
Just to do the work to set up a new plan, though they've kind of help on that a little bit now what I would say is we are seeing the pipeline begin to grow back up on that and it's particularly.
Relevant for some of the protection base coverages like life and disability, we're actually seeing some interest emerged first in our voluntary coverages and the piece I guess I would always put that provides really nice bounce.
Balance on that is persistency, our persistency numbers, which I would argue are already really strong got even stronger so when I look at the things that are happening with sales and a balance that out.
With the persistency activity I feel really I feel really good about what we're seeing in terms of overall premium levels for the business and Amy before John gets to a second question, maybe a little bit of thought I mean, we've seen life insurance sales actually go the other direction and again the sentiment of the marketplace. So maybe just touch on that pool. We go to the next one yes, I think I think when we think about the life.
Business term life interest and Dan you noted this in your comments has been incredibly strong I think there is both an understanding that people need protection, maybe more than they were understanding that before and also I think its a nod to the effect of the investments we've made in our straight through processing are really paying off when we look at our term life business and we look at the experian.
You can have on that term life business that is industry, leading the place where we're seeing a little bit of holding in terms of making sales decisions is probably more aligned with our executive variable UL business, which is really aligned with our end Q business. So we're seeing the same pattern of some employers saying they came.
The the kind of held off on making some decisions second and third quarter and were seeing that pipeline begin to pick up as well John you have a follow up.
Yes, thanks on the decline in the AG way.
Yes, I know there was a low fee legacy client that was exiting how much of that decline is from that and how much remains.
Yes. The vast majority are in portion yes, it's a great question and one that everyday can address head on Friday, yes. Thank you for the question John When you look at the way as you noted when we acquired the block of business. We understood that there was a large legacy client trust in capacity.
Client.
That was slated to leave.
And so we have recognized.
Probably 80%.
The withdrawal from that client with the rest slated to go out over future quarters, but the other thing to note. We were aware of this at the time of the transaction and the revenue impact of this particular client was small.
Yes, so the persistency John on the block is about what we expected from the initial pricing adjusting for this large withdrawal. The other thing noteworthy, although we didnt break it out we've actually added.
Fairly large well known fortune 50 company.
Were they awarded us business and that same period of time. So we're open for business as it relates to that trust in custody business. So we feel good about it thanks for the question.
The next question will come from Ryan Krueger with KBW. Please go ahead.
Hi, good morning.
When you originally announced the well.
Deal you talked about a 28% to 32% margin I think by the end of 2022.
With the additional expense saves you're expecting and then the lower interest rate outlook I guess do you.
I still think you can get to that level and do you have a sense of whether.
You may get there now yeah.
Yeah, Great question, and all very relevant as you think about it I mean, we are transitioning a massive block of business over in the midst of a pandemic and interest rates have moved the wrong way and I again, I applaud the team for the.
Synergies, they've been able to realized thus far and process the necessary work.
Rene do you want to frame, what you think best thinking right now as it relates to long term profitability on on margin and growth, yes, absolutely. So when I step back and when we look at this acquisition. We remain very pleased with how the business is performing and how the integration is going.
And of course, it starts with that great strategic fit this reinforces our standing as a top three retirement provider it positions us for future growth a really strong cultural fit as was noted in the prepared remarks and the other thing that we can see is that expense synergies and the.
Financial fit continues to remain a very good picture.
So when we.
Look at the expense synergies in particular.
Right. After we close on this block of business, we made a very important strategic decision and that was to migrate to a single IP platform as quickly as we could and to combine the best applications from White star with a principal applications so that.
We could introduce enhanced capabilities across the board both to IR t. customers as well as to principal customers.
What this meant though was that we delayed the transition of the clients over from IR team to principal.
What it allows for though is that client retention is right on track and we know that we can create a very smooth and seamless transition for our clients and that was demonstrated in the first wave migration that occurred a couple of weeks ago. It was.
Incredibly smooth and very seamless for both planned sponsors and for participants alike.
But as we as we go through this migration.
And the migration for the retirement side will be completed in June of next year.
We can see that the expense synergies that we had originally modeled we believe we can exceed those by about 50%.
We'll begin to see expense synergies emerge in the summer next summer and we will continue to increase throughout the latter part portion of next year and we'll continue to drive towards.
A a mature.
Synergy expense synergy run rate throughout 22 being realized in 23. So the good news is that the debt critical decisions that we made early on are paying off their delayed but we can see that the expense synergies will be greater sort I just just to it specifically on Ryan's question the 20.
32, if you think about the offset of the Iowa, we are with the improved synergies, it's probably well within that range, we wouldn't adjust the range at this point no that would be the range remains intact. Okay. Brian is that help.
It does thank you and then I just had one quick follow up are you seeing dental utilization.
I guess normalize now and are you expecting it to be more more typical in the in the fourth quarter.
Wouldn't could it couldn't get any more untypical than the last few quarters, but yes, we think that on a trailing 12 month basis, it's going to come in line any closing comments there no I think I think we're seeing it begin to normalize keep in mind that fourth quarter, we would have seen people moving through their benefits of fourth quarter typically had.
Really low seasonal utilization I would say, we're going to go back to normal, but it might feel more like mid year normal in terms of normalization. So so we're seeing it normalize some of the pent up demand has been exhausted and we would expect fourth quarter to be more of a normal pattern of dental utilization. Thanks Ryan.
Thank you very much.
The next question will come from Suneet Kamath with Citi. Please go ahead.
Thanks, Dan I, just wanted to start with the assumption review.
If we go back to last year's review I think you change that great up period from 10 years to seven years and I believe this quarter, you're kind of going back.
To seven years, so curious why that change and if you didnt change it back to seven years.
The charge or the ongoing impact those disclosures that you gave us earlier in the call would those have changed dramatically.
Yes. Thanks for the question. So yeah, you're correct. So last year's review, we would have hit a 4% treasury in 2029 and at this year's review, we are hitting a three and a quarter in 2027. So it's a two year change in that cycle.
What I'd say is that it's not an exact science, there's many inputs that we look at we talked to our economists we look at.
Here perspective, as well as other external perspective, and I think the fact that we're getting to a lower ending point made us comfortable that getting there in 2027 made sense to get to your second question. When we look at the total impact from interest rates, which was about 85 of the 114 million after tax.
The impact we think about two thirds of that is from the reduction in the starting point.
So again when we did last year's review tenure treasuries were around 2% when we struck at a for this year's review it was closer to 65 basis points and so given that two thirds was the starting point I don't think having.
Having that be extended beyond seven years would have had a significant impact on the on the numbers.
Got it Okay and then my second question I guess for Dan just bigger picture, we are starting to see more insurance companies rationalize their business mixes either selling businesses or taking blocks of business and Reinsuring. Then there's clearly a lot of capital available to do that.
Curious if that enters into your game.
Game plan at some point I'm thinking specifically about fixed annuities or any spread based blocks may have but also on the individual life side.
Absolutely so Nate so I think I'd put it into two different buckets. The first bucket is.
Are we committed to the fees spread and risk business. The answer is yes, do we like the insurance business. This risk business. The answer is yes, we think it very much serves the needs of small to medium sized employers. It provides us with a lot of flexibility in and frankly, it's a it's a great way for us to serve the needs of our clients.
The other half is financial transactions related to the in force blocks of business and I would tell you our capital markets area looks very closely at this looking at the long term implications on capital how would be redeployed and the financial impact on those blocks of business. So it's very much top of mind for as it gets a lot of consideration we.
Not yet seen the right.
Opportunity that we felt we wanted to move it forward, but certainly in the category you've identified that is part of our consideration appreciate the question.
Thanks, Dan.
The next question will come from Eric bass with Autonomous Research. Please go ahead.
Hi, Thank you can you talk about your expectations for RSV flows as we move into 2021 do you expect to get back to the 1% to 3% organic growth range as withdrawals normalize or could there be some ongoing impacts from a slowdown in recurring deposit growth.
Yeah ill throughout your day quickly, but I would just say this I am absolutely somewhat shocked by the fact, we could be in a global pandemic and they've held up as well as they have and there is a lot of variables that go into it but certainly these hardships were big contributor not only here in the U.S., but also as you know and and in some of the emerging market countries as well.
Rene maybe give us some insights and thoughts on and the components and where you think this might go in the future yes, absolutely.
So when.
When we think about net cash flow.
There are a few drivers of net cash flows that are really coming into play this quarter and that we have to think about as we look forward to 2021. So the first very important component in impact that we're seeing this quarter is the cobot related withdrawal.
And this has related.
Resulted in about a billion dollars of withdrawals in third quarter about 3% of our total participants.
And we do see that's consistent with what we experienced in second quarter and it's also very consistent with the activity that we continue to see in fourth quarter.
So when we think about what could slow down that kind of withdrawal.
There are a couple of things first much relies on how the pandemic progress is and how the underlying economic and employment trends progress.
The other wildcard is.
The cares act has removed the penalty.
That was applied to hardship withdrawals that sunsets at the end of this year.
If there is a new stimulus bill that that continues that waiver of the of the penalty we could continue to see this.
Go into 21.
So we'll continue to watch it but I think it's fair to say that covered related withdrawals will continue to pressure net cash flows likely into 21, certainly for the remainder of this year and likely into 21 then.
The mix very important lever is recurring deposits and.
And so if you look at the recurring deposits, we were running at about an 8% increase.
On a trailing 12 month basis, that's declined to a 3% increase in recurring deposits.
For third quarter 20 over third COVID-19.
And this decrease again is attributable to a couple of things.
First off is the number of deferring participants decreased about 2% when you look at the quarterly comparison.
Even though the deferral rate remained pretty consistent and pretty strong.
When we look forward for that we do anticipate that that will continue to be pressured again much depends on how the economy and how the pandemic begin to to resolve and what kind of a rebound we began to see but certainly there will be pressures there.
And then last of all is that the sales new sales.
We we do see pressure and have seen pressure, particularly in the small to medium size pipeline in sales as businesses have been very distracted as a result of covance.
On the other hand as a result of the IR team acquisition, we seen an incredible bump up in our large plan pipeline.
Simply as as a result of having a larger foot.
Print in that space and more and more consultant relationships.
We do think that we will see some recovery in the new sales for 2021, but again much depends on the economy and the pandemic.
The good news throughout all of this is that our client retention remains very strong we are not distracted. We continued to serve plan sponsors and participants very well. So when we look at the overall net cash flow for 2020, we anticipate that will be flat.
And certainly it was been pressured again bye bye withdrawals covert withdrawals from recurring deposits looking forward, we will have a better view for you in the outlook call but.
But we do see that some price pressures will persist Eric hopefully that helps.
Yes. Thank you and then if I could just ask quickly on PGTI margins, which are very strong this quarter I think about 40%.
I expect to be able to sustain a higher than target margin in the near term due to expense savings do you expect for that to come back down to more of the target range give or either higher comp accruals or other adjustments given the recovery in revenues.
Given this is Tim Dunbar his last earnings call is happening this over so I'll be curious to say what how.
How would you answer this question how he sets up path for the future Tim Please.
Thanks, Eric for the question and Im going to be nice to have tell you that I think we would guide you to our long term guidance somewhere between 34 and 38% margins.
And so while this quarters margins were quite strong as you mentioned at 41%, we think that fourth quarter and beyond would be probably more in the trailing 12 month range, which right now stands at about 37%.
Thanks for the question Eric Thank you.
The next question will come from Tom Gallagher with Evercore. Please go ahead.
Good morning, just just a follow up to underlying persistency trends in in Europe or is the business are you seeing any signs when you unpack the data that you're you're seeing pressure from.
Particularly in the small business segment.
Companies going out of business are you seeing any any real change in trend from bankruptcies.
Ed plans actually going away or do you not really seeing that emerge yes.
Yes, no it's actually probably been one of the.
You know I guess solid outcomes that's come out of this.
Although there are a lot of displaced employees and hospitality and we know the airline industry and Weve restaurants, we know those have been impacted many of those didnt have a small employers anyway didnt have a lot of these plans in place we've seen some shrinkage of the participant base within those plans, but we.
Not seen an increase in labs, and I think you know, although new case sales are down new plan formation I think we can all appreciate if you didnt have one are you going to do in the midst of a pandemic, but we're now you want to provide any additional color to that to that thesis, yes, absolutely. So when we look at.
New planned formations to Dan's point that certainly has slowed.
But when we look at plan terminations due to simply plans being dissolved.
That is not emerging at least in this quarter as as a threat.
And I think some of the stimulus package actions that we're taking are helping the small employer the small to medium size employers.
So we may see that emerge in future quarters, but we're not seeing it emerge right now I think the one thing that's been really.
Interesting and also reaffirms, having a very diverse block of business within Ari is is that when we look at plan size and we look at the impact on net cash flow.
Our small to medium size business block has been really very resilient.
In terms of of almost every measure in terms of the in plan participation in terms of employer match and the employer match being continued for that block of business.
And so we look when we look at the net cash flow for the SMB business, we actually seeing see yet performing.
Slightly better than the large plan business Tom before you get your next question that in case, you're wondering just another data point here at principal SPD would be a group benefits should be quite comparable where we've seen the participants within the existing plans will fall Amy somewhere in that 2% to 3% range.
And yet the plan lapses or terminations are no air are not escalated. So I'd say smbs for principal holding together nicely. If you have a follow up yes.
Yes, Thats right.
That is good to hear Dan in terms of the underlying experience. The yeah. My follow up is just on on your credit loss expectation sounds like more getting pushed out to 2021 I guess the you know the.
400 million dollar number in a vacuum sounds a bit higher than I would have guessed based on the way things are trending right. Now is that just out of an abundance of caution or are you seeing anything on the commercial real estate side.
That would cause you whether whether that's delinquencies that are not yet impacting you because of the FDIC has that moratorium.
Can you unpack that a little bit why why you still like that I would say now.
All right Thats it for next year.
Yeah. Thanks again for that question at the time, we won in print your term of abundance of caution is one that we use frequently around here because we want to make sure that we've got.
Adequate capital and I do think we've sized up the balance of the year nicely and by making that adjustment, but Tim you want to sort of give your insights and perspective on the 400 for next year.
Thank you and I'd just be remiss, if I didnt mention that we've talked often about the quality of the portfolio going into the pandemic and I think thats across the board. So it would be in our fixed income portfolio certainly on our commercial mortgage loan portfolio and accident our alternatives portfolio. So we think we were coming.
At this pandemic from a position of strength.
And our expectations were set generally by some high level modeling that we've done based on the great financial crisis and as we move through 2020, we saw unprecedented fed action, we saw government stepping in and it really delayed a lot of our credit losses and a lot of the direct that we think could have taken.
Place in 2021, and Thats been a very positive story and you've seen prices on bonds rebound and actually our commercial mortgage loan portfolio has maintained very high rating, we've been through that portfolio.
And we think it stands pretty strong so as we look at 2021 in our projections there.
Scrapping it a little bit I would say the range for 2021 as we sit here today is quite wide and depends again a lot on fed actions on government support.
And what we're seeing there is that we don't really have a lot of specific ideas about drifting credit losses, but we would expect as cope it rears its head again.
And weighs on the economy that there's potential that we could have up to 400 million in losses and thrift most of that again would be coming from the bond portfolio, probably only about a third coming from the commercial mortgage loan portfolios. So that's some of the color and some of the way we're looking at it.
Obviously welcome.
We will continue to go through the portfolios and refine these numbers as more information comes out Tom Thanks for the question.
Thanks.
The final question is from Josh Shanker with Bank of America. Please go ahead.
Hello.
Josh Your line is open. Thank you sorry about that thanks for taking my call.
So I want to talk about the commercial mortgage portfolio. The 14 loans that have gone into a forbearance.
Are you talking about the process of the.
Mortgagee and your relationship and how that process is set and whether or not we should expect more loans to go into full balance over the next 12 months.
Hi, what's sort of the process by which this occurs.
Please sure so what really happens is that we get contracted from the borrower.
Bar, where it gets us than some very specific information about the property their situation and generally makes a request of what they're what they're asking for and generally when we say forbearance that doesnt mean were for giving the loan payments for a period of time. It really means that we're working out and I'll turn.
It is schedule and so we think the property can get back on SP and start paying.
The mortgage payments again, sometimes it's an extension of the work but.
But it's very dependent on the specifics of that situation.
We have 14 as you suggested those are all in good state so they're living up to the loan agreement that we had set with them.
And we have worked through the entire list of request that we've had now what happens next depends a lot again on on how the pandemic plays out how the economy plays out, but we're watching and monitoring commercial mortgage loans very closely but I expect to see some additional modification.
And probably.
Going into 2021, as we see how how quickly the economy looks and what we're thinking is going to happen, but I.
I'd be risk remiss, if I didnt say that I think thats portfolios incredibly high quality I don't really see a lot of losses coming through our loan to values. After going through every one of the properties and may still stands at an average of 50% loan to value and we still have good debt service coverage. So.
Thats kind of how we're looking at the portfolio. Thanks, Tim Josh Jeff last follow up I'll stick on this topic just to exhaust that these 14 exam.
Examples do they have anything in common geographically or property type or anything we need to think about in relationship to the rest of the portfolio.
Yes, the one thing I'd say.
Generally speaking these loans are coming from retail.
The retail and we have a very small exposure to shopping malls, but a fair number of those are coming from shopping mall.
And then we have some hotel properties, we have less than 1% of our commercial mortgage loan portfolio and hotels, but again those have been modified.
And then just a smattering of properties that I would say don't have much else think comment, but just on the retail front I want to I want to emphasize that our portfolio is quite a lot less exposed to retail than it would be in the ne creep and assets as what we watch pretty closely.
And in addition to that is heavily weighted toward grocery anchored anchored retail or single store box retail.
And those projects are holding up actually quite well.
Thanks, Tim Yes.
I appreciate the question Josh.
We have reached the end of our Q and a session Mr. housing your closing comments. Please I'll be quick we had a board strategic retreat. We talk about strategy at every board meeting, but once a year, we get together and interrogate our strategy, we get some third party unaffiliated views about the strategy and I would tell you.
We exhausted in terms of looking closely at the feed the spread and the risk businesses. The countries that were in the portfolio that we have and we really feel there's good long term upside for investors in our current strategy.
Adjusting on the margin the second I would second thing I'd take away from today's call strong balance sheet and liquidity significant scale and capabilities. We have good differentiators and the 5% dividend yield at todays price. We still think is very strong to investors and then I would say from a historical perspective and going into the future.
Sure we have a strong reputation for aligning our expenses with our revenues we've deployed capital in a very thoughtful and balanced approach and we'll continue to do that both in the near and the long term and we are going to continue making investments in our future I've seen too many businesses become irrelevant because they failed to make investments in their businesses and I look.
At these digital investments and frankly, whether its international or domestic we're seeing those paid off so thank you for your interest in the in the in the company and look forward to talking on the road have great day.
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