Q4 2020 Principal Financial Group Inc Earnings Call
Good morning, and welcome to the principal financial group fourth quarter, and full year, 'twenty and 'twenty financial results Conference call. There will be a question and answer period. After the speakers have completed their prepared remarks, if he would like to ask a question and at that time simply press Star and then number one on your telephone keypad, we would ask that you be risk.
Capex all of 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 fourth quarter, and full year, 'twenty and 'twenty conference call.
And as always materials related to today's call are available on our website at principal Dot com backslash investor similar to last quarter, we posted and additional slide deck on our website with details on our U S investment portfolio and other supplemental details following the reading of the Safe Harbor provision CEO, Dan Houston, and CFO Deanna <unk>.
<unk> will deliver some prepared remarks, then we will open up the call for questions.
Others available for the Q&A and session include Renee Schaaf retirement income solutions, Pat Halter Global asset management, Luis Valdes principal International and Amy Frederick U S insurance solutions. Some of the comments made during this conference call may contain forward looking statements within the meaning of the private Securities litigation.
And on Reform Act the company does not revise or update them to reflect new information subsequent events or changes in strategy.
Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed and the company's most recent annual report on form 10-K filed by the company with the U S Securities and Exchange Commission.
Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures reconciliations of the non-GAAP financial measures to the most directly comparable U S. GAAP financial measures maybe found on our earnings release financial supplement and slide presentation, we would like to remind you of two upcoming investor.
Outreach states, our 'twenty 'twenty, one outlook call will be held on February 25, and we're hosting our Investor day on June 15th Dan Thanks, John and welcome to everyone on the call I Hope you and your family are healthy and well.
This morning, I will discuss key performance highlights for the fourth quarter and full year 2020, 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 additional details of our fourth quarter and full year 2020 financial results impacts from Covid are capital and liquidity.
He position and details of our investment portfolio.
'twenty was truly one for the ages, a global pandemic as well as social and political unrest here and abroad bottomed.
Bottom line, we dealt with these challenges head on and kept our promises to our customers and our employees and 'twenty and 'twenty, we prioritized exceptional service to our customers and employee safety above all else just as we have throughout our 141 year history and.
And our response to Covid, we waive fees on hardship withdrawals and grain and premium concessions to support our customers, including individuals and businesses of all sizes, who found new and often creative ways to manage through this pandemic, we kept our employees safe transitioning to remote work around the world I am extremely proud of our employees from maintaining excellent.
Customer service and staying focused on our long term objectives, such as integrating the institutional retirement and trust business and advancing our digital strategy that is yielding tangible benefits to our customers as discussed on previous calls we have less exposure to industries that have been impacted the most from COVID-19, including hospitality and travel.
Strength and resolve of the small and medium sized businesses and we work within our U S retirement and insurance businesses combined with our unique ability to serve them continues to be a differentiator for principal our SMB customers had been resilient and are leading the recovery.
And our retirement business full year net cash flow from our SMB block were positive and within our 1% to 3% of beginning of year account value of guidance and.
And and group benefits and group growth turned positive in the fourth quarter and it was even stronger and businesses with less than 200 employees starting on slide four principal delivered full year 2020, non-GAAP operating earnings of $1 $4 billion, excluding significant variances non-GAAP operating earnings were flat compared to two.
2019 higher fee revenue from increased AUM and account values as well as ongoing expense management actions were partially offset by foreign currency headwinds ongoing fee pressure and lower sales.
We continue to align our expenses with revenues and our full year results reflect nearly $250 million and benefits from our expense management actions and.
Some of the expense savings will naturally reset and 'twenty 'twenty, one we will remain diligent and managing expenses in line with revenues.
We ended the year and a very strong financial position with increased clarity and stability and the macro environment and we restarted our share repurchase program with $75 million of buybacks during the quarter and.
Along with our consistent dividend, we were able to deploy just over $900 million to shareholders and 2020.
Total company AUM increased $71 billion year over year or 10% to a record $807 billion at the end of 2020. This increase was driven by positive net cash flow favorable market performance and the migration of some of the IRT retirement business during the fourth quarter Pgi and also closed the year with a <unk>.
Record managed and sourced AUM of $502 billion and $245 billion respectively.
Full year Pgi sourced sales were a record $56 billion and increased 30% from the prior year. This speaks volumes to the strength of our in demand products and solutions, our distribution teams as well as our consistent investment performance at quarter and performance for 83% of principal mutual funds Etfs separate accounts.
And collective investment trust were above median for the one year time period 70 per cent for the three year, 80% <unk>.
Five year and 91% for the tenure.
Additionally for our Morningstar rated funds 74 per cent of the fund level AUM had a four or five star reading. This continued strong performance positions us well to attract and retain assets going forward.
Principal International finished 2020 with $165 billion of AUM. This was an increase of 6% on a constant currency basis compared to year end 2019, we achieved a record AUM and Mexico, Hong Kong and Southeast Asia, and the fourth quarter AUM.
And our China joint venture, which is not included in on a reported AUM was $118 billion at year, and China AUM continue to be pressured by market trends.
We are working diligently to address our customers' needs by developing new product solutions and strengthening our investment process harnessing, our institutional client network and growing our digital distribution network in China.
For the full year total company net cash flow was a positive $14 billion, including two and a half a billion dollars and the fourth quarter and outstanding results during a volatile and difficult year.
Pgi sourced net cash flow was a positive $1 $1 billion and the fourth quarter and $5 $6 billion for the full year and increase of $4 $8 billion from full year 2019.
Pgi managed net cash flow of $2 billion for the full year was driven by strong retail and institutional sales along with positive general account cash flows.
We continue to benefit from multiple distribution channels and client types through our general account retirement retail and institutional clients to position us well as we move into 2021.
Our I S spread at $1 $2 billion of positive net cash flow on 'twenty, and 'twenty, including $200 million and the fourth quarter RIS spread had $900 million of opportunistic MTN issuances and the fourth quarter and $2 9 billion for the full year and pension risk transfer sales were $700 million and the fourth quarter.
<unk> and $3 billion for the full year RIS fee and full year net cash flow was a negative $300 million largely driven by $2 $8 billion of COVID-19 related hardship withdrawals.
Excluding these hardship withdrawals in 'twenty and 'twenty RIS fee net cash flow would have been within our 1% to 3% of beginning of year account value guidance prints.
Principal international generated net cash flow of $1 $2 billion and the fourth quarter, marking the 49th consecutive quarter of positive net cash flow full year net cash flow was $4 $2 billion with positive flows and Brazil, Chile, Mexico, Hong Kong and Southeast Asia. This was a 20% increase on a constant currency base.
This compared to full year 2019.
And Chile quarterly net cash flow increased throughout 2020, and we had a record number of net new customers transfer to Cooper them. During the year digital solutions continue to be a key to our strategy and drove strong business outcomes and 2020, and we make it easier for customers to do business with us.
I'll now share some additional execution and business highlights starting with the integration of our IRT business.
And we continue to move customers over to our platform. The second successful migration occurred in December most importantly client and participant feedback from the first two migration waves has been overwhelmingly positive a majority of the IRT business is slated to migrate and the second quarter of 2021, and we anticipate the synergies to begin to emerge.
Later this year as we've previously discussed we will provide additional details on the integration and expected synergies during our outlook call next month.
We were one of the first day market with a uniquely designed pooled employer plan principal leaves combining our integrated retirement plan administration customer service and investment management capabilities.
This paves the way for and unrelated employers to participate in a single pulled employer plan to give more people access to retirement benefits and individual life. We received a record number of life insurance applications and 2020 is that pandemic increased awareness and mortality for term the number of digital applications tripled from the big.
<unk> of the year and nearly all policies were delivered electronically, we strategically review our business portfolio to ensure alignment with our goals expertise and client demands.
Using to enter or exited business or product when it makes sense yesterday, we announced we are exiting our retail investment and retirement business and India. While recent business results within our India asset management business had been improving we did not have the scale needed to deliver long term value for our shareholders and.
Additionally, in individual life, we recently discontinued new sales of our lifetime guaranteed universal life products on <unk>.
<unk> portion of our overall block and the most interest rate sensitive. Both these actions are examples of our strategic focus and discipline.
Our core values continue to guide our actions in 2020 as shown by some noteworthy third party recognition.
Pgi was awarded one of the best places to work and money management for the ninth straight year by pensions and investments in 2020.
Principal was included by Forbes and the list of best employers for women and best employers for diversity. We also earned a perfect score on the human rights campaign Foundation's 2020, corporate equality index and disability equality index, and we were named a 'twenty and 'twenty top company for executive women by working mother media our 20th.
I'm on this list principal also received the corporate innovation award from plug and play in 'twenty and 'twenty.
This distinct recognition is awarded to corporations that have demonstrated a commitment to expanding their innovation culture, and cultivating relationships with startups and other businesses and thought leaders.
Slide 22 highlights some of the progress we've made towards our long term commitment to environmental social and governance efforts.
ESG is becoming increasingly important to how we are viewed by our customers investors and partners, especially outside the U S.
We recently joined the United Nations Global compact the world's largest corporate sustainability initiative.
Principal has also been recognized as a climate change leader with an a minus rating from carbon disclosure project 2020 presented many challenges our employees customers and communities have risen to these challenges.
Last week democracy prevail with the transition of power and the United States, We urge unity and bipartisanship as we continue to advocate on our customers' behalf and promote policies to provide greater access to financial security and <unk>.
Guided by our diversified business model, winning strategy strong financial position and core values, we look forward to serving our customers, especially during the times they need us the most before I turn the call over to Deanna I'd like to take a moment to personally. Thank Luis Valdes, who has provided nearly 30 years of leadership and dedication to principal.
Luisa passion for emerging markets, leveraging technology and embracing local cultures and customs has contributed significantly to our international success. He also leaves a legacy of strong local teams and leaders, including Roberta Walker and Thomas Chung, we couldnt be more happy for you Luis and your family and wish you the best and you're well.
Deserved retirement with that let me turn it over to 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 and full year and.
<unk> from Covid, our current financial position and details of our investment portfolio.
Covid continues to impact on business and we've included additional details of the impacts and our conference call presentation again this quarter.
And while uncertainty remains on how the impacts will play out most of the metrics. We're tracking continue to trend better than we expected at the onset of the pandemic.
Net income attributable to principal was $473 million for the fourth quarter and $1 $4 billion for the full year quarterly.
Quarterly net realized capital gains of $63 million included minimal credit losses of $3 million.
Reported full year non-GAAP operating earnings of $1 $4 billion or $4 94 per diluted share included $410 million and the fourth quarter or $1 48 per diluted share.
Excluding the impacts of the actuarial assumption review and other significant variances full year non-GAAP operating earnings of $1 $6 billion or $5 67 per diluted share were flat with and 2% higher than 2019, respectively. This included $401 million in the fourth quarter.
On our $1 45 per diluted share a solid and to an unprecedented year, excluding significant variances. The non-GAAP operating earnings effective tax rate was 16, 7% for the fourth quarter and 17, 6% for the full year with and our 16% to 19% guided range and so.
And on slide six we had several significant variances during the fourth quarter.
He's had a net benefit to reported non-GAAP operating earnings of $5 million pretax $9 million after tax and <unk> <unk> per diluted share.
Pre tax impacts included a 50 million dollar benefits from higher than expected variable investment income from higher prepayment fees and alternative returns on <unk>.
Teen million dollar benefit and ISP from lower than expected DAC amortization due to the point to point increase and the equity market and.
And net negative $32 million impact from Covid related claims and other impacts and RIS spread and USAF and negative $18 million impact on RIS fee from IRT integration cost.
And a net negative 11 million dollar impact and principal international and $13 million of higher than expected and high performance and Latin America was more than offset by a negative $24 million impact of inflation and Brazil.
Additional details of the Brazil inflation impact are available and the supplemental slides on our website.
While volatile quarter to quarter, both variable investment income and DAC amortization were relatively in line with our expectations for the full year.
Slides seven and eight provide details of the COVID-19 related financial impacts, we experienced and our fourth quarter and what's the updated thoughts on potential impacts of the pandemic could have on our business and our results and 2021.
Covid impacted fourth quarter pre tax operating earnings by a net negative $32 million, including a negative $32 million impact and specialty benefits from claims and disability and group life unfavorable dental and vision claims from continued pent up demand as well as the final month of the 10% Prime.
Liam credit and the final personal protective equipment payments for our dental customers that ended in the fourth quarter.
A negative $15 million impact from claims and individual life.
The impacts were partially offset by a $15 million and benefit from favorable reserve gains and RIS spread over the last nine months of 'twenty and 'twenty Covid has negatively impacted total company non-GAAP pre tax operating earnings by a net $29 million.
The fourth quarter, and direct Covid, and mortality and morbidity impacts and specialty benefits individual life and RIS spread net into a negative $11 million after tax impact with approximately a 140000 COVID-19 deaths reported in the U S. During the quarter.
This was slightly better than our COVID-19 sensitivity of a $10 million after tax impact to earnings for every 100000 U S. Covid deaths due to more favorable reserve gains and RIS spread.
And 2021, we're now estimating 300000 U S COVID-19 deaths heavily weighted to the first half of the year.
We continue to be comfortable with our current COVID-19 sensitivity for earnings.
A good sign of recovery and merged in our group benefits business during the quarter and then group growth moved positive by half a percent and the fourth quarter and this recovery is even better and businesses with less than 200 employees were in group growth and increased just over 1% double the rate of our entire block and the retirement business recurring deposits.
Increased 7% compared to fourth quarter 2019 improved from the 3% growth and the third quarter another sign of recovery.
Full year participant withdrawals were 11% and beginning of year account values and included $2 $8 billion of Covid related withdrawals and this was about one percentage point higher than we typically see.
We had $800 million of Covid related participant with from <unk>, and the fourth quarter and $2 8 billion for the year and principal International Chile passed a law and early December allowing participants to take another COVID-19 hardship withdraw this negatively impacted fourth quarter AUM by $1 $3 billion.
To mitigate some of the overall revenue pressures, we faced in 'twenty and 'twenty, we took action throughout the year and manage our expenses aggressively compete.
Compared to our expectations at the beginning of the year, we reduce expenses nearly $250 million, including approximately $40 million and the fourth quarter. This impacted all businesses and contributed to a resilient margin. Despite revenue pressures, excluding significant variances fourth quarter operating expenses were seasonally higher than the.
Other three quarters like we see every year, but at a lower level.
Fourth quarter was 5% higher than the average and the first three quarters lower than the seven to 10 per cent that we typically see.
Looking at macroeconomic factors and the fourth quarter. The S&P 500 index increased more than 11% and the daily average increased 7% compared to the third quarter and 15% from the year ago quarter, benefiting revenue AUM and account value growth and RIS fee and pgi.
Moving to foreign exchange rates average rates improved again this quarter, but we continue to face headwinds compared to a year ago and.
The fourth quarter pre tax operating earnings included a positive $2 million compared to third quarter, 'twenty, and 'twenty and negative $8 million compared to fourth quarter, 2019, and a negative $56 million on a trailing 12 month basis.
Excluding significant variances fourth quarter and full year results were relatively in line with or better than our expectations for most of the business units given the current macroeconomic environment.
The following business unit comments exclude significant variances.
Despite the challenging operating environment, the legacy business and ISP performed well throughout 'twenty and 'twenty compared to 2019, we saw growth and recurring deposits low contract lapses and growth and both planned count and participant count all fundamentals that will fuel future growth and.
Margin for the legacy business ended the year strong at 33%.
Total RIS fee and full year net revenue growth of 9% was slightly below our guided range, primarily due to the reduction and the interest on excess reserves rate impacting revenue and the IRT business.
Full year, IRT integration cost of $53 million or slightly lower than the $55 million to $65 million guided range.
These were partially offset by a 19 million dollar reduction and the earn out liability for a net 34 million dollar impact are.
Spreads pre tax operating earnings and margin for both fourth quarter and full year benefited from favorable non COVID-19 related experience gains and growth and the business.
P. G is full year revenue growth of 3% was slightly below the guided range due to pressure on management fees from the volatility and markets early in the year.
P. G is margin ended the year very strong and higher than 2019 at 38%, reflecting strong expense management.
Macroeconomics pressured principal international throughout 'twenty and 'twenty, excluding the impact of foreign currency translation principal International's full year revenue increased 2% over 'twenty and 19 with a 33% margin.
Especially benefits fourth quarter and full year pre tax operating earnings were impacted by unfavorable non COVID-19 related group life and disability claims keep in mind, both the fourth quarter 2019, and full year 2019 benefited from very favorable claims.
Turning to capital and liquidity on slide nine we ended the year and and even stronger financial position and we started at the end of 'twenty and 'twenty, we had $2 $7 billion of total company available cash and liquid assets, we had $2 $9 billion of excess and available capital, including one.
$8 billion at the holding company more than double our target of $800 million to cover the next 12 months of obligations.
$620 million and excess of our targeted 400% risk based capital ratio at the end of the year estimated to be 440%.
And $460 million of available cash and our subsidiaries.
The RBC ratio remains elevated as we continue to expect impacts from credit and draft and credit losses to play out.
We expect the RBC ratio will move down toward our targeted 400% throughout 2021.
Our non-GAAP debt to capital leverage ratio excluding E. L. C. I is low at 23.5% our next debt maturity of $300 million isn't until 2022, and we have a well spaced ladder debt maturity schedule into the future.
Despite the pressures and uncertainty over the last year, we remain and one of the strongest financial positions and 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 10, we deployed more than $900 million of capital and 'twenty, 'twenty, one and $229 million in the fourth quarter to common stock dividends and share repurchases.
After a pause due to COVID-19 and the resulting capital uncertainty, we restarted our share repurchase program in the quarter with 75 million and buybacks and have $775 million remaining on our current authorization.
Last night, we announced a 56 and common stock dividend payable on the first quarter unchanged from the fourth quarter and our dividend yield is approximately 4.5%.
As shown on slide 11, our investment portfolio remains high quality diversified and well positioned and importantly, our investment strategy hasn't changed.
A few takeaways at the total company, we are and a $4.2 billion net unrealized gain position. This includes a $7 4 billion dollar pre tax net unrealized gain and our U S fixed maturity portfolio, which increased another $900 million during the fourth quarter and the impacts from a further tightening of spreads.
Were partially offset by an increase in rates the U S.
Commercial mortgage loan portfolio average loan to value of 49% and average debt service coverage ratio of 2.5 times improved slightly from the third quarter.
We have a diverse and manageable exposure to other alternatives and high risk sectors and importantly, our liabilities are long term, we have disciplined asset liability management, and we arent force sellers.
The full year impact from credit drafts and credit losses were approximately $235 million with $70 million and the fourth quarter and line with the range given on last quarters call.
This is significantly lower than the 400 million to $800 million range that we estimated at the start of the crisis.
The estimated impact of credit drift and losses in 'twenty and 'twenty. One is now $300 million improved from the $400 million estimate and the third quarter on.
Our diversified and integrated business model combined with our financial strength and discipline has served us well throughout 'twenty and 'twenty signs of recovery emerge late in the year across many of our businesses with growing momentum in November and December or optimistic heading into 'twenty and 'twenty, one and we'll provide more details on our guidance for the year on our February.
25th outlook call.
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, ladies and gentlemen that star one for any questions over the phone line, we'll pause for just a moment to compile the Q&A roster.
And the first question will come from Ryan Krueger with K B W. Please go ahead.
Hey, good morning.
Your first question was on capital deployment.
Understanding we're still in the middle of the pandemic, but you could clearly have a strong capital position. So was hoping you could comment on your capital management priorities.
And we start to emerge from the pandemic.
Yes. Good morning, Ryan This is Dan and I'll ask Deanna and respond as she pointed out in her prepared comments, we've got a lot of runway remaining in terms of board authorization and 775 million. You also her comments as it related to credit drift and.
And and credit losses, and we find ourselves frankly, and a very favorable position, but as we have historically, we've always tried to take a very balanced approach for capital deployment that anyone and give some insights and I'll start there where I'm, Dan and at which is you'll see us continue to be very balanced and disciplined relative to capital deployment and we IV.
We suspended our buyback and early March at the start of the market turmoil, but we did re enter the market and fourth quarter was 75 million and purchases and we're in the market. Currently today as we sit here and the first quarter due to our strong capital position as well as more certainty on our future impact at the February outlook call well Riyadh.
And or eight are expected external capital deployment range for 'twenty 'twenty, one, but I think bottom line, where we have a very strong capital position and all deployment opportunities and options are on the table, Brian Jeff a follow up.
Just one on your comment Deanna that the RBC, you expect to trend down towards the 400% target and is that due to credit drift or or excess dividends do you expect to take out on the sub or I guess a combination of both.
It's probably a combination of both you did hear us say on our on on the prepared remarks that we do expect some impact from drifts and impairments and 'twenty 'twenty, one and obviously, it's been a very unusual market cycle and given the support that the government has done and helping businesses through that.
And but again, we did lower even our 'twenty one expectation last quarter. We said it was expecting around 400 million. This quarter, we're saying around 300 million probably with a range of 200 to 500. So we do think there will be some impact, but we also expect that we will dividend out of the life company to the holding.
Company, so it'll be a combination of both thanks.
Thanks, Brian for the questions. This morning. Thank.
Thank you.
The next question will come from Humphrey Lee with Dowling Partners. Please go ahead.
Good morning, and thank you for taking my questions. On my first question is in your prepared remarks, you talked about seeing positive signs of topline recovery with recurring deposit growth and RIS fee and in group growth in specialty benefits, especially in the SMB market.
And you provide some additional color in terms of on what you saw from your clients and how confident and as you with that and do you have to reach an inflection point.
Yeah, and I as reflecting back countries, you're asking that question, we used the term back and Oh wait and online as these green shoots.
Economy had drug on for so long and it seems like we've gone through this cycle.
And frankly, a fraction of the time, although it was more intense and to your point about recurring deposits and implant growth. The returning of some employer matches. There. There are just a lot of green shoots within the small to medium sized business as we said in the prepared comments that these SBA smbs.
I've been incredibly resilient.
And that's where as you know we've got a large exposure and we're very encouraged by that so we feel that there is fundamentally a very strong recovery in place, but I'll have Amy go first and then Renee with some of those additional insights Amy yes, Sir Humphrey. Thanks for the question.
I think where I'm seeing it the most and and again you as far and level of confidence that that will continue I'm pretty confident that the small to midsize market is feeling pretty good about their positioning right now keep in mind a lot of the areas, where we provide benefits are not necessarily going to be and those hardest hit industries like some of that record.
Cash and and tourism and travel and things like that.
We're going to be providing and things like knowledge industries, and manufacturing and kind of those white and gray collar industries and really the the feedback we're getting from small business owners in those industries is that they are almost having a harder time finding staff for the positions that they have openings for.
And so what we're getting from the small business industry is leased and the ones, where we have a deep and broad footprint is that we're going to see good growth per day.
Yeah. Thank you very much for that question and just to tag on a little bit.
When we look at our pipeline and we see how that's performed over the course of that last year. We did see that the pipeline and took a significant decline as a result of COVID-19 early and the ear, but they're really positive news is that that pipeline has begun to rebound and that's true for the small plan market.
And as well as for the mid and for the large and.
So that again showed some signs of strength and shows signs of recovery with respect to the recurring deposits.
When we look at the in plan enrollment and the number of participants who are actually deferring. We did see that decline of course it reached its low point and may but since and it's just continued to climb back out. So we're very nearly at the same level of in plan.
Net deferrals that we would've seen one year ago, which is a very encouraging sign and to Dan's point, we are seeing employers begin to reinstate matches and that those reinstatement or happening quicker with the small plan market. So good signs all around on free.
Follow up yes, so and my second question is for Louisa related to principal international but before my questions I would like to congratulate and Louise on his upcoming retirement and wish him the best and his next chapter.
So my question is the media reports suggested your partner in Brazil, and Banco do Brasil.
Launching the sale of its asset management business. So I guess, a two part question definitely potential sales of any impact on the operation of your JV partnership and also would you be interested and that business.
Yes, great Great question and as you know we have a very.
Deliberate approach to capital deployment around acquisition and has to build on scale and it has to build on capabilities or distribution and one thing I'll say about ponca and they've been a great partner all of these years and I don't think anybody and the organization, maybe Roberto Walker, but Luis knows them, well and so but we should want to frame a little bit about what our thinking is.
About what it's going to take to be successful and our thoughts on further acquisitions with NPI.
Sure then come from.
Good morning, and thanks for your best wishes to.
Two things on and continue with the same argument that done and put together.
I'm not referring particularly to this particular opportunity that you have mentioned, but we're gonna be always able to look and we're gonna be eager to look every single opportunity that we might have and Brasil proceeding is a very strategic country for us is the largest economy and letter and where he got by far and having said that we are as you know.
And for U S, where pension experts longterm save and experts and asset manager so.
We do have our own asset management platform in Brazil, and even opportunity that a we may explore implement this one or any future one we're going to pay a lot of attention to.
Talking about Banco we have a long runway with with Banco <unk>, and <unk> and portinari to explore different ways and or to extend our partnership and Banco. So I would say that and then the years to come more to come about Brazil, we're very eager about that country in particular I appreciate the question Humphrey.
The next question will come from Jimmy Buhler with J P. Morgan. Please go ahead.
Good morning, first just on the D C market and you mentioned trends getting better in terms of deferrals and matches, but you have seen fairly high hardship withdrawals and what's your view on how that's going and when do you see that abating essentially.
Yes, Jim and good morning, and it's.
It's a great question and I'll throw it to Renee just just remember that the cares act had a lot of provisions within it that actually encouraged withdrawal hardship withdrawals those and those have now more and away. So Mike My guess as Renee can frame what her expectations are running yeah. Thank you and good morning Jimmy.
And as Dan just referenced the cares Act and.
<unk> had a provision that allows participants to access 401k funds without penalty for COVID-19 related financial hardships and all of that required was a simple signature.
That particular provision sunset Ed at the end of 'twenty and 'twenty. So the COVID-19 related hardship withdrawals and that we've been reporting on well now and they came to a stop at the end of 'twenty and 'twenty we.
We will of course continue to see normal hardship withdrawals for the plan, but those are normal hardship withdrawals requires a much more stringent evaluation and so we anticipate that hardship withdrawals will return to a more historic pattern.
And we will not be something that will likely need to comment on and the future Jim and on that point.
And just real quickly.
Through the first third of the quarter, then and so the first third of the first quarter.
Yes, so yes hardship withdrawals and by definition came to a stop and the end of 'twenty and 'twenty and so now the hardship withdrawals pattern that we'll see going forward will be more closely aligned with the overall economic conditions and again, we'll have a much more stretch.
And definition.
And for accessing those funds if we see it uptick it'll be relatively small and probably will not be something that stands out with respect to our net cash flow as you have your second question Jimmy.
Yeah, just on specialty benefits. So as you went through last year, there were sort of.
And your loss trends, especially on the dental business, where people are deferred and care. Initially and then you had a catch up and claim are you seeing any noticeable trends with the surge in Covid cases recently and how do you expect margins to trend and the dental brought it through this year.
Amy Please yeah. Thanks for the question on.
I think.
Just to state a couple of things about fourth quarter, I think fourth quarter, we had thought things would normalize a little bit more and and they did it in terms of what we'd consider sort of a frequency or utilization metric, what didnt normalize and fourth quarter with severity and we don't talk about dental severity a lot as much as we do on like a disability business.
Those higher dollar procedures, so restoration, the fillings or the extraction, those where we saw a lot of activity, particularly in December right at the end of the year and so what I'm expecting for 'twenty and 'twenty. One is dental offices are open and people are going back and they're comfortable seeing the dentists. The dentists are comfortable on.
And good care using PPE, they've got there they've got it down to a science in terms of.
Their patient flow with the right safety measure.
<unk> measures put in place so my hope and expectation for 'twenty and 'twenty. One is that we will begin to just simply normalize back to normal claim patterns for dental.
Jimmy and you're poking around on this sort of macroeconomic recovery question and I get that one data point that I saw I thought was interesting was that the high watermark for unemployment benefit request peaked out in may.
At $25 9 million request that number is now down to $4 8 million, so significant reduction and the number of unemployment benefit request and although that number is still higher than the pre pandemic measure it's down considerably and my guess is that's going to tie directly towards growth and.
Small to medium sized business hardship withdrawals loans et cetera, so I wouldn't be surprised to see that.
Significantly improve throughout the balance of 2021, thanks for the question.
Okay.
The next question will come from Tom Gallagher with Evercore. Please go ahead.
Good morning, first first question on the margin and Pgi, which over 40% this quarter.
And.
I guess, the highest I recall, it being well well above your target is there something on sustainable about the margin at this level, whether anything unusual on the revenue side or.
Should we expect.
On a bigger increase and expenses relative to revenue growth as we roll into 'twenty and 'twenty one.
Well all I know is we are Tim Dunbar retired and have ultra stepped in and so packed and we count on higher margins from here. That's maybe Mike question for you.
Thanks for the message and vote of confidence Tan.
I think the.
I stopped strong market performance, Tom obviously aided.
Our strong fourth quarter, I think on expense management, which I'll talk about it and then it also aided and I think a strong fourth quarter and also I just had some really strong cumulative net cash flow that started to to generate the additional revenue and our alpha generation was very strong. So absolutely was a strong quarter in terms of our margins as you know our long term guidance right now is 34 to 30.
8% margin second half of the year and the third quarter and fourth quarter, we are above 40% and so on.
And your question a fair question in terms of what we expect going forward and we'll be talking more about that and the on the call in February but the margins definitely and then.
And are benefiting from the favorable markets and from our expense controls and we're going to continue to have I think.
Strong disciplined approach as we go forward in terms of trying to have good expense alignment with our revenue and can change and produce good investment results, which have the same attracts the net cash flow from an expense perspective, Tom I think we do have some seasonality coming up and the first quarter.
As you recall, we usually have some payroll taxes and from long term comp reconciliation that we'll probably have a little bit of impact on first quarter margins, we probably will have some additional expenses coming back through travel and.
If we see the vaccines and developing as we see them and we start to see our distribution teams get back on the road to see clients and I think that's a positive in terms of potential for growth and.
And obviously, we do have a reset in terms of some of the incentive compensation structure, we have and and the asset management group.
But we are going to continue on the expense side to invest invest for growth and that is a very important part of our our expectations going forward too so.
To come on that but I feel good about where we're at right now thanks, Pat or Jim follow up Tom.
I do Dan Yeah, just.
Similar question, but different Directionally RIS fee, you typically have a nice lift and margins. When you go from <unk> to <unk> on I guess.
Seasonal spending patterns, but I know there was a big push on expenses this year and so we didn't see the big uplift and <unk> at least to the extent that we normally do would you still expect to see a pretty big drop and expenses.
And improvement in margins and RIS fee, when we roll into <unk> or will that be more muted than we normally see.
Renee you want to provide your thoughts there and I know, we'll have more to talk about and February on the outlook call. Yeah, absolutely. Thank you for the question Tom.
With respect to the first quarter.
We will see expenses of course reset and so.
I think that I don't anticipate that we're going to see expenses be anything out of line or out of pattern with what we have seen with previous first quarters or anything that's particularly unusual there.
With respect to margins and and so now youre looking at the other and Youre looking at revenues.
Revenues of course are impacted by the market, we've had a nice market performance, so far and this quarter, but it still remains to be seen how that that really tracks for the rest of the quarter.
Remember that with the Iot block of business, we will see a little bit of pressure on that because of the anticipated lapse rates, which by the way are right in line with our models. So nothing out of the ordinary there so.
We can get more into our outlook and the upcoming call, but I'm not seeing anything thats, particularly remarkable.
And or anything that's out of the ordinary with first quarter.
Hopefully that helps them and it does thanks.
Alright I appreciate it thanks for the thanks for the question.
The next question will come from Josh Shanker with Bank of America. Please go ahead.
Yeah. Thank you very much.
Our first question on the IRT integration tourists on $150 million earn out potential.
Retention was better than thought that I guess would come at the two year anniversary of when of the close.
How's that transaction looking and should we be considering modeling and a bit more acquisition of acquisition cost for the transaction and.
Yes, I appreciate that question and I'll take that one quickly there won't be an earn out that earn out was structured around the belief from the seller that that it might be better than what our modeling suggested we've got a little bit of experience and what we thought would transition so.
We've already completely included within our numbers. The fact that there would not be and earn out but as Renee suggested our modeling and what we had originally frame for investors was that we likely would not end up having a better retention that would have generated and earn out and the seller.
And second question Josh.
And just want to understand what's happening and the term life sales department, It's obviously very successful best or maybe ever.
And is that something we should consider being ongoing and ongoing a comp contributor in terms of the numbers I guess is the fourth quarter, anomalistic, I guess and or whatnot.
Yes. This is one of those good stories, where we can not only talk about solid sales, but how technology that we've invested and helps drive this business. So Amy you won't help us there yeah. Thanks for the question. So so we are really glad we made the accelerated digital investment and term life straight through processing and what that enabled us to do with.
With really keep up with the demand and.
Some of the things, we're doing with that straight through processing or the things you would would imagine we're trying to make sure. It's really easy that as much of it and be done through some sort of and accelerated their simplified underwriting process and that you can handle it all digitally we've made that extension, though to our distributors. So it's not just a front facing customer its to our distributors and.
Intermediaries, they get to take advantage of this all the way through digital and E delivery of the policy and so when I think of fourth quarter fourth quarter was a little bit of a culmination of a whole bunch of business throughout the year and making sure. We got it fully process. So I would say fourth quarter is probably a little bit.
And on overstated in terms of what we would think to model, but the market interest matched with our capabilities is very high for term life. So I would continue to assume that that makes up a really healthy portion of our lifestyles growth and <unk>.
Josh just on the technology side I noted that there were.
72 per cent of the medical applications were done online and 96% of the applications were delivered and in E delivery format, So really efficient operations and within within the Liberia. Thanks for the questions. Thank you.
The next question will come from Erik bass with Autonomous Research. Please go ahead.
Hi, Thank you I was hoping you could talk about the underlying earnings power for principal international and some of the drivers there and I think he and normalized earnings to $71 million this quarter and $76 million last quarter, but market levels and most of the currencies I think were favorable quarter over quarter. So are there other dynamics.
Should be thinking about going forward.
And I'm glad you asked that question, Eric because you know Luis has done an amazing job, leading our principal international and frankly, there's been just a lot of headwinds related to inflation and caught a there has been regular regulatory changes there has been currency FX challenges, but every time.
And you dig into these numbers and you Peel it back and you look at the underlying fundamentals of these businesses.
<unk> around the world Theyre quite extraordinary and they're growing and so with that Luis you want to help help frame. This force well yeah. Good morning, Eric and this.
Great question, So you're right, we've pointed out a $76 million our run rate and in the third quarter now we're much more comfortable saying that 71 is a better representation for fourth quarter.
The main reason of that Delta is China, you can attribute to $4 million of that delta to China, and the $30 billion.
And.
Negative net customer cash flows that we had and money market funds and the third quarter. So the other delta is additional expenses mainly.
On several expenses that we incurred in letter on Marinca that.
<unk> be certainly more than offset the slight tailwind that we have for FX. So that's the clear and served for your question and if you allow me.
We're working Super hard in order to overcome the situation in China, We have had a very interesting development and different funds and increasing <unk> and different funds like equity funds by 16% for the full year, we continue adding more products and better serve our customer so I'm positive about China.
We have to overcome that particular.
Good amount of as you know make it and net customer cash flow that we suffered in third quarter and a slight <unk> 5 billion and the fourth quarter.
One of the proof points, and China, which I find pretty extraordinary back to technology. If you went back to the fourth quarter of 2019, we had 900000, new digital equity customers in other words, they didnt purchase on money market account, they purchased online and equity product for the fourth quarter of this year that number was.
And one 7 million new investors purchased on equity product through through on online solution. So again, when Luis talks about the underlying value creation and China. We still think it is very much intact did you have a follow up Eric.
Yes, Thank you and maybe if you could switch to Pgi and was just hoping you could provide some more color around the flow trends at net asset class level and.
Particular, it looks like they're set a rebound and fixed income and demand, but I think equity flows have softened after being really strong and the second quarter. So was just hoping you could provide a little bit more detail there.
Pat when and help US there yeah, Erika and thanks for the question.
One of the great things are on our platform as we offer a lot of choice.
And we also offer a lot of value and here's our alpha generation capabilities and.
And Dean a global a sort of a provider of that choice and that value. We see flows that vary from quarter to quarter.
And I think.
This quarter was a strong core and and fixed income prior quarters, we had strong quarters and things like real estate and so my Mike sort of take on all this is we're going to continue to be very solution oriented and it hasn't got worse and management firm and provide choice and my guess theres enough money and motion throughout the world and our segments of the market.
Retail retirement, and institutional that want to providing choice and I think we can capture share and the marketplace. So my guess and we will continue to see those asset classes shift a little bit from quarter to quarter, Eric but.
We think we're well positioned both in fixed income equities and Tammy alternatives, we think some of the opportunity again, and it's a pick up in alternatives and and our strength and real estate and we're starting to see some investor interest actually pick up globally and real estate again, and I think you're awfully confident about your ESG strategy as well and feeling that our method.
Of investing and aligns well with the with what consumer demand is today, yeah. That's a great follow up to and we definitely are seeing more support and from an investor base and ESG and it really started in Europe, it's really becoming global and it's really starting to take hold and the U S and.
Our investment strategies in terms of investment approach processes and corporate ESG I think we're well positioned to have.
Have I think a great sort of flow of that capture and to Charles and Eric Thanks for the questions.
Thank you.
Next question will come from so neat Kamus with Citi. Please go ahead.
Thanks, Good morning.
And just looking at slide 12 of your deck you show that the normalized RIS fee earnings are down about 11% year over year despite pretty.
Pretty strong equity markets. It seems like the legacy business is performing well based on the margin. So it feels like a lot of this is the IRT business. So can you help us think through.
How much of the pressure is related to the interest on excess reserves versus maybe some of what youre seeing in terms of shock lapses.
So a lot a lot of pressure on either we are Renee you want to help.
And better understand this dynamic yeah, absolutely and thank you for that question and when you look at the pre tax operating earnings.
Fourth quarter 'twenty over fourth quarter, 19, and you adjust and take out the impact of the actuarial.
Adjustment to reveal.
And there are a couple of things that are impacting that first off of course market performance is a help and.
And that that definitely has a nice impact.
Upward.
And it helps revenues, but that is.
Offset then by lower revenues from deposits as a result of the Iot, our res Arab and that had about a 10 million dollar negative there.
Jacques Labs also comes into play, but shock lapses is running right, where we thought it would when we originally did the model. So we're very pleased with the shock lapse and then of course, there's just the normal fee pressures and fee compression that we see with.
This particular line of business. So when we look over all.
We remain very positive on how this line of business is performing and how the fundamentals are unfolding and when we look at the IRT integration. We're really pleased with how this is positioning us for future growth.
This acquisition has not.
Not only propelled us to be one of the top three retirement providers and the United States. It's also allowed us to leverage this transaction and this acquisition to add a number of different capabilities to our platform to serve plans of all sizes and it's given us considerable stress.
Thanks.
And presence and the large play and market. So when we look ahead.
We can see that the acquisition and the fundamentals of this business are very solid.
And we anticipate that we'll begin to see that unfold over the course of the next few quarters. Thanks and each you'll also see on the 25th of February when we reset the metrics, we'll have our arms around the completion of the integration of the of the next few waves, which ends at the end of the second quarter. So I think you'll have really good measures and metrics and.
Actions that you can use and your model after the the outlook call did you have a follow up.
Yeah, I did thanks for that and that was helpful.
So one of the things we're hearing from another player and the retirement space is that some of the fee compression is coming not just from competition, but from.
Plans wanting to charge fees based on head count not just.
AUM as opposed to AUM. So just curious if youre seeing that and maybe some thoughts on is that a better model as companies try to rationalize expenses charging based on head count as opposed to AUM.
I don't think that's a new phenomenon and that's existed and the large case market for a very long time, but per day your thoughts sure yeah, absolutely. So we see a variety of different ways that plan sponsors want to charge fees and wanted to have fees charged to them rather.
And as Dan mentioned and the smaller plan market that tends to be a little bit more based on assets as you get into the larger market. It tends to be more based on participants and.
And other activities are activity based.
I think the point is though is that we will remain flexible we are flexible and how we do our pricing constructs were willing to plan sponsors to figure out ways that best reflect their plan objectives.
And.
It's just a normal part of the market and something that we're used to dealing with it seems like the nomenclature. That's most commonly used Senate and these finalist presentations as required revenue and we know what our margin targets are we know what it takes to Ah ha.
Handle a more complex case, we know that the economics on a Trs plan, which is about 50% of our new sales. This past year are different and so there is always a a revenue analysis is shown on any new piece of business that comes to the principal I appreciate the questions.
Thanks.
The final question. The final question is from Brian Meredith with UBS. Please go ahead.
Hey, guys. Good morning. Thanks. This is Mike Ward on for Brian.
Just had a question on the $250 million of expense reductions and 2020, certainly impressive result.
Just curious if you had any sense of maybe how much you expect of that to recur in 'twenty and 'twenty, one or might tick up a little bit.
Yes, so what we've said and in our prepared comments of the $2 50, we thought we would have about 40% of that or about $100 million go forward, but when we chat on the 25th we'll certainly give you our outlook on on expenses D&O and if you have anything else you'd like to add to that or not no.
I think our numbers are tracking really close to what we talked about last quarter as well. So we ended the year at 250 with $40 million of that happening and the fourth quarter and.
And if we compare 2021 current expectations on expenses to what we would've thought pre pre crisis. It's down about 100. So that gets you to that 40%. Obviously, our net revenue is down from what we would have anticipated. Some of that is COVID-19 related. So our focus is really on and <unk>.
And our expenses with our revenue.
But those targets on revenue and margins will again reiterate at the upcoming outlook call. Mike do you have a second question.
Yeah, just a high level strategy question, so there's been an uptick and some M&A and the life and retirement industry lately. Just wondering if you could maybe comment on how you view some of your insurance or underwriting risk businesses and I know these are complementary to much of your core franchise, and some actually hedged some risk and the spread business, but I wonder.
And if you know maybe you might be more interested or less and evaluating opportunities today versus a year or two ago.
Yeah. Thanks for the question, Mike and as you could witness by our decision to divest ourselves of our.
Business in India, we manage the portfolio.
Literally every quarter and we look closely at capital deployment, we do a risk analysis to understand what risk exists. We obviously just completed and actuarial review on the third quarter. So when we look at our annuity block and life block. These are core to what we do and to your point they are complementary and they're strategic.
<unk> aligned our business owner executive solutions, our deferred comp funding vehicles that are produced and large part out of the life Division are very helpful. Our customers are looking for us to provide guaranteed income and retirement, we want to be smart about how we price. Those features. These are these are balance sheet intensive businesses, but at the present.
We do use third party for reinsurance purposes, and we evaluate options, but at the present time, we feel very good about.
Our business model and and how we finance it and the and the various component parts, but very much appreciate the question. Thank.
Thank you.
So with that we'll bring the I'm sorry, please operator.
And we have reached the end of our Q&A session. Mr. Houston Your closing comments please sorry.
Sorry to beat you to the punch there I was ready to go I guess.
And again appreciate Humphrey your comments and shout out to Luis Luis. Thank you for just an extraordinary job Luis will still be close by and he is going to remain our chairman of the board of principal international.
For the next couple of years, you'll be available to us to help and our relationships with joint venture partners he'll be a great sounding board for Roberto and Thomas and certainly be very helpful to me as we continue to expand and grow our international presence and I know this quarter had a lot of noise I read your write ups.
I think in the midst of a global pandemic, you're going to get a lot of noise. There is there is we tried to be incredibly transparent with you as investors. We want you to be well informed with what our thinking is we look forward to having deeper conversations with the outlook on the 25th of February but certainly some porcher I.
And your support so with that we'll bring the call to and then thank you.
Thank you for participating on today's conference call. This call will be available for replay beginning at approximately one P. M. Eastern time until end of day February 4th 2021, four and 886533 is the assets access code for the replay the number to dial for the replay is 8558592.
056, U S and Canadian callers or 404537, and three or 406 international callers, ladies and gentlemen, Thank you for participating you may all disconnect.
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