Q1 2021 Principal Financial Group Inc Earnings Call
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Good morning, and welcome to the principal financial group first quarter of 2021 financial results Conference call.
There will be a question and answer period. After the speakers have completed their prepared remarks.
If you would like to ask a question at that time simply press Star then the number one on your telephone keypad.
We would ask that you please be respectful of others and limit your questions to one and a follow up so we can get everyone in the queue.
I would now like to turn the conference over to John Egan, Vice President of Investor Relations.
Thank you and good morning, welcome to principal financial group's first quarter 2021 conference call as always materials related to today's call are available on our website at principal dot Com backslash investor.
Following the reading of the Safe Harbor provision CEO, Dan Houston, and CFO Deanna stable will deliver some prepared remarks.
Then we will open up the call for questions. All of this is available for the Q&A session include Renee Schaaf retirement income solutions, Pat Halter Global asset management, and Amy Friedrich 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.
The company does not revise or update them to reflect new information subsequent events or changes in strategy for.
<unk> and uncertainties that could cause actual results to differ materially from those expressed or implied.
Are discussed in the company's most recent annual report on form 10-K filed by the company with the U S Securities and Exchange Commission.
Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures reconciliations of the non-GAAP financial measures to the most directly comparable U S. GAAP financial measures may be found in our earnings release financial supplement and slide presentation. We're.
We're looking forward to connecting with many of you at our 2021 Investor day.
Which will now be held on June 29, the of that will be virtual and we will share more details in the near future. Additionally.
Additionally, our 2020 corporate social responsibility report was recently released and we launched the new sustainability subsection on principal Dot Com, our 2000 Twenty's CSR report highlights several achievements from the year and new commitments. We've made view of the report and learn more about our ESG strategy of principal Dot com.
Backslash sustainability Dan.
Thanks, John and welcome to everyone on the call. This morning, I will discuss key performance highlights for the first quarter and the growing momentum, we're seeing across our diversified business the <unk>.
Anna will follow with additional details of our first quarter results and our current financial position.
2021 is off to a strong start beginning on slide four we reported non-GAAP operating earnings of <unk>.
$424 million, excluding significant variances non-GAAP operating earnings increased 18% over the first quarter of 2020, driven by solid execution and improved macroeconomic conditions.
We're very optimistic about the opportunities that lie ahead as momentum has returned in many of our businesses and we continue to see resiliency in small to medium sized businesses in the first quarter. We had strong in group growth from positive employment trends in group benefits and we had record sales in our retirement business while.
Deferrals and company matches increased and returned to pre pandemic levels.
We continue to be in a very strong financial position with $2 $8 billion of excess and available capital.
We deployed over $250 million of capital in the first quarter through share repurchases and common stock dividends.
Last night, we announced a 61% common stock dividend payable in the second quarter of.
<unk> increase over the first quarter dividend. This increase helps us stay on track with our targeted 40% dividend payout ratio. We're confident that our businesses will continue to generate strong earnings and create long term value for shareholders. We closed the first quarter with record total company AUM of $820 billion.
An increase of nearly $190 billion for 30% over pressured first quarter of 2020. This includes $19 billion of positive net cash flow and we achieved record pgi managed and pgi sourced AUM of $508 billion and $250 billion respectively.
Our diversified suite of products and solutions are in demand in the current market and continue to be relevant to institutional retail investors as well as our affiliated businesses investment performance remained strong as 57% of principal mutual funds Etfs separate accounts and collective investment trust for above.
Median for the one year time period, 77% for the three year, 76% for five years and 89% for the tenure for our Morningstar rated funds, 71% of fund level AUM had a four or five star rating longer term performance, which drives of our net cash flow.
Remains strong and positions us well to attract and retain the assets going forward.
The principal international reported of $160 billion of AUM in the first quarter of 15% increase on a constant currency basis compared to a year ago, China AUM, which is not included in our reported AUM increased to $155 billion in the first quarter total company net cash flow was a pause.
<unk> $8 billion in the first quarter $5 billion higher than the first quarter of 2020, RIS fee generated $5 $7 billion of net cash flow driven.
Driven by a record $8 billion of retirement sales growth in reoccurring deposits as well as low contract lapses and participant withdrawals the pipeline is robust, especially in the large plan market.
And is expected to drive strong growth in full year sales participant withdrawals as a percent of average account values returned to pre pandemic levels. So in the first quarter a recovery debt is expected to persist throughout the year.
For Pgi sourced first quarter net cash flow was a positive $400 million driven by strong institutional flows.
<unk> managed net cash flow was a negative $500 million.
To better meet customers' needs, we chose to move of approximately $7 $5 billion for mutual funds. The collective investment Trust in April this will not impact second quarter net cash flow nor will there be a material impact on revenues or earnings first.
First of all international reported $1 $4 billion of first quarter net cash flow the 15th consecutive positive quarter, driven by Southeast Asia and Hong Kong, Although not included in our reported net cash flow, China had $34 billion of net cash flow in the first quarter, while China clearly benefited from money market funds being.
In favor in the first quarter, we're making progress to diversify our offering through our joint venture with China construction bank, including $360 million of positive net cash flow and equity strategies in the first quarter. In addition, our digital distribution continues to grow in China, We added 3 million new digital retail mutual fund.
Customers and doubled our digital AUM in the first quarter alone the <unk>.
<unk> continues to impact many countries, we operate in Brazil in particular in.
The industry wide net deposits were down 19% from a year ago, while we continue to lead the industry in pension deposits first quarter net cash flow of $100 million declined from the fourth quarter and in Chile first quarter AUM was negatively impacted by $600 million from COVID-19 hardship withdrawals improved from $1 three.
$3 billion in the fourth quarter I'll now share some additional execution and business highlights starting with the integration of the institutional retirement and trust business. The integration is going very well and remains on track with a third successful migration occurring just last week.
The migration of the retirement business will be completed in the second quarter and trust and custody in the third quarter in total were adding more than $2 2 million retirement participants and approximately $140 billion of retirement account value through the IRT acquisition expense synergies will begin to emerge in the second half.
Of the year and the transition services agreement will wind down by the end of the year.
To offset some of the pressure on earnings for working on solutions to mitigate the impacts that the low I O E of our rate has had on the acquired trust and custody business. We're beginning to realize some tangible benefits of the IRT acquisition, having scale in additional distribution channel has helped drive record written.
Current sales in the first quarter and our pipeline has doubled compared to a year ago as we're servicing more customers revenue synergies are starting to build and exceeded our expectations in the first quarter, including IRA rollovers automatic Iras and asset management opportunities. This business is a powerful grew.
The driver for principal we are increasing our scale to better serve small medium and large sized clients, we're enhancing our capabilities and we have a more robust platform that is needed to compete in the retirement business moving forward a few other business highlights to note in RIS spread we had approximately $900 million.
Of opportunistic MTN and gig issuances in the first quarter. The PRT pipeline continues to build and we expect of robust second half of the year individual life sales rebounded with a 30% increase over the prior year quarter, driven by nonqualified deferred compensation and important component of our total retirement.
<unk> and our small to medium sized business strategies, a few weeks ago principal unveiled new corporate responsibility commitments that bring additional accountability to our ESG strategy through these commitments were pledging enhanced support for women and minority owned businesses continuing to nurture a diverse and inclusive work environment and by <unk>.
<unk> thousand 50, we are targeting net zero carbon emissions as many of you are aware we entered into an agreement with Elliott management earlier this year to conduct the strategic review of our business mix capital management and capital deployment as well as add two independent directors to our board the review, which is being led by the Finance Committee of our board is well underway.
Wayne and will share the outcome in late June we are considering the entire spectrum of options to enhance shareholder value meet the needs of our customers and strengthen our position as an industry leader.
We've had very insightful conversations with many of our investors and sell side analysts since reaching our agreement with Elliott management in mid February.
I want to thank all of you for your candor and your perspectives, our conversations with Elliott remain constructive last night, we announced Claudia mirrors Abel is joining our board of directors Claudio is immense global experience and leadership in the technology industry will bring valuable insights to our digital initiatives around the world combined with the addition of Melissa beams.
In February we've now added two new independent directors in 2021 per our agreement with Elliott with that let me turn it over to Deanna.
Thanks, Dan Good morning to everyone on the call. This morning, I'll share the key contributors to our financial performance for the quarter the impacts from COVID-19 as well as our current financial position.
The first quarter was a strong start to the year with net income attributable the principal of $517 million, including $94 million of net realized capital gains with minimal credit losses, we reported $424 million of non-GAAP operating earnings in the first quarter or $1 53 per diluted share.
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Excluding significant variances non-GAAP operating earnings of $442 million or $1 60 per diluted share increased 18% and 19% respectively compared to the first quarter of 2020.
As shown on slide four we had three significant variances during the first quarter. These had a net negative impact to reported non-GAAP operating earnings of $25 million pretax $18 million after tax and <unk> <unk> per diluted share.
Pre tax impacts included a net negative $21 million impact from COVID-19 related claims of negative $19 million impact from IRT integration cost and of $15 million benefit from higher than expected variable investment income.
Specific to variable investment income alternatives and prepayment fees benefited RIS spread and individual life by a combined $25 million.
This was partially offset by a negative $10 million impacting corporate as the increase in interest rates negatively impacted some mark to market fixed income investments.
The first quarter financial impacts from COVID-19, we're limited to mortality and morbidity in RIS spread and the U S insurance solutions.
Approximately 200000 U S COVID-19 related death in the first quarter, the net $21 million pretax impact was slightly better than our sensitivity would've suggested primarily due to more favorable impacts in RIS spread.
For the full year, we're now estimating a total of 275000 U S. COVID-19 deaths are about 75000 in the remainder of the year.
This is slightly lower than what was anticipated in our outlook due to the vaccine rollout.
We continue to see further recovery across our U S businesses in the first quarter group benefits in group growth was the strong positive and just under 1% during the quarter and dental claims returned to expected levels for the quarter.
In the retirement business recurring deposits increased 10% compared to the first quarter of 2020, driven by an increase in both the number of people deferring and the number of people receiving the match as well as the impact from the IR team migrations and.
Additionally, a record $8 million of sales and low lapses contributed to the strong first quarter net cash flow.
Looking at macroeconomic factors in the first quarter. The S&P 500 index increased 6% and the daily average increased 9% compared to the fourth quarter and 26% from the year ago quarter benefiting revenue AUM and account value growth in RIS fee and Pgi.
Foreign exchange rate tailwind emerged in the first quarter of but remain a headwind compared to a year ago impacts to reported pre tax operating earnings included a positive $3 million compared to fourth quarter 2020 of negative $4 million compared the first quarter 2020 and of negative $45 million on a trailing 12 month basis.
Excluding significant variances first quarter results were in line with our better than our expectations for all of the business units. A few comments <unk> trailing 12 month revenue growth of 2% was muted due to lower performance fees and transaction and borrower fees due to the pandemic, we expect to be at the high end of the.
<unk>, 9% to 13% guided range for revenue growth for the full year and principal international while <unk> performance was $5 million lower than expected in the first quarter. It was offset by favorable variable investment income and Shelly.
Excluding the impact of foreign currency translation principal International's trailing 12 month revenue was flat compared to the year ago with of 33% margin revenue growth is expected to improve throughout the year and to be within the 8% to 12% guided range for the full year, turning to capital and liquidity on slide six we remain in a strong financial.
Possession, with $2 $8 billion of excess and available capital, including $1 $8 billion at the holding company more than double our target of $800 million to cover. The next 12 months of obligations $575 million in excess of our targeted 400% risk based capital ratio estimated to be for <unk>.
37% and $400 million of available cash in our subsidiaries.
We expect the estimated 437% RBC ratio to move down toward our target of 400% throughout 2021 as capital is deployed.
Our non-GAAP debt to capital leverage ratio, excluding the OCI is low at 23%. Our next debt maturity of $300 million isn't until late 2022, and we have of wealth space ladder debt maturity schedule into the future.
As shown on slide seven we deployed $252 million of capital during the first quarter, including $100 million of share repurchases.
We remain committed to 600, the $800 million of share repurchases in 2021.
So far in the second quarter, we have completed approximately $75 million of repurchases through April 26.
Last night, we announced the 61 common stock dividend payable in the second quarter of five 9% increase from the first quarter and our dividend yield is approximately 4% share.
During the first quarter of the impact from credit drift in credit losses was and material and we're now estimating of 100 million dollar impact for the full year improved from the $300 million estimate at the end of 2020 'twenty 'twenty. One is off to a great start with record assets under management and strong earnings in the first quarter the macroeconomic outlook.
<unk> has improved from year end and will help fuel our continued growth across our businesses.
We're looking forward of welcoming the remainder of the IRT retirement customers of the principal in the second quarter and are excited for the opportunities that lie ahead as John mentioned at the beginning of the call I look forward to connecting with many of you at our virtual Investor Day on June 29th where we will share our strategies for long term growth. This concludes our prepared remarks.
Operator, please open the call for questions.
At this time I would like to remind everyone that to ask a question.
And then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Our first question comes from Jimmy <unk> of J P. Morgan.
Hi, Good morning, So I had a question on the retirement and the asset management business and you've had very strong flows of near FSA business and I think there were a couple of large wins and typically when FSA flow of their strong your asset management flows tend to be good as well, but I think of this case.
The plans had more of an open architecture platform. So just wondering if that's the trend we should see going forward as well.
And also how what are the implications of this for your overall the earnings for the enterprise.
Because in the past obviously the majority of the FSC assets have been managed by Pgi.
Good morning, Jimmy This is Dan it's a great question and clearly when you make an acquisition of the size of the Wells Fargo of IRT business, we knew that it was going to come with the larger planned capabilities. We also know that we had tapped into a new set of consultants the advisers that might bring us the size.
Unity, so it's worthy of spending a few minutes and digesting that and to do that.
And of construct the way I'll have Renee talk about our continued commitment to the SMB market, but also this larger case market.
Absolutely and Jimmy Thank you for that of that question. Let me first start by talking about the sales that we saw in first quarter and they are very strong of a very pleased with the the development so far.
And I think the thing that's the most pleasing is that when we look at first quarter sales. They were strong across all plan sizes small medium and large.
And in particular in the large plan market, we've seen very robust pipeline growth.
And then the corresponding sales in the and of course, we did have two very nice large plan wins in first quarter.
I think the thing to know there is the sales cycle of a little bit longer in the large plan market.
And so that will result in a little bit of volatility in terms of when that business of close and a lot of that business may not become effective until 2022, just because of the long sales cycle.
But nonetheless, we're very pleased with our sales across all plants size segment. The second part to your question was what happens with asset capture and how are we driving assets to pgi.
And a couple of comments there first off principal is unique from the perspective of having a very strong track record in driving proprietary asset management capabilities and our new sales. So while the industry average is somewhere around 30%, we routinely beat that.
Particularly in the small and the mid sized planned market larger plans can be expected to drive assets as well to pgi and an important source of that comes from the rollover opportunities and also the small small amount force outs, but also we are introducing our.
Terry.
Asset management capabilities on the client by client basis.
Where it makes sense and where we compete very well and so we do anticipate seeing some nice lift there too as we began to migrate the IRT business into the black and we began to work with the planned sponsors.
As they consider their their investment lineups. So again very pleased with the first quarter results and strong momentum across all plan sizes, and we continue to capture a good share as proprietary asset management, particularly in the small and mid size market gave me a lot of to think about 30 day follow up.
Yes, just on the same topic should we assume that your fee rate would decline as you become more competitive in the larger case market. Obviously you can.
The generated good margins, if you've got scale, but in terms of few of the feed the fee rate itself should that be going down over the next few years.
You are putting on more large case business.
Yeah. So the average fee as it if you look at the fees.
The overall, you'll see that the highest fees are associated with the small plan market and then the of course, they scale down that the larger plan markets simply because of economies of scale within a particular plan now.
Now in terms of overall competitiveness and what we're seeing in the marketplace.
We see the competitiveness across all segments, but I cant I it would be unfair to say that we see the fee pressures in the large plan market at a greater rate than what we see in the other planned market and other size market. So.
Again, we continue to see fee pressures of the whole industry sees the pressures you typically see higher amounts of fees in the small planned market compared to the large but we're not seeing a disproportionate competitive pressure in the large plan market. Thanks for the question Jim I appreciate it. Thank you. Thanks.
Our next question comes from some free Lee of Dowling and partners.
Good morning, and thank you for taking my questions I.
I guess just to follow up on the on our RIS fees I think in your prepared remark you talked about the revenue synergies from the <unk> T block exceeded your expectation in the first quarter can.
Can you quantify that for us and how should we think about it the as you continue to migrate to the business into your platform.
So it's a good question of one I'll have Renee speak too, but again, we made initial assumptions, having underwritten this opportunity and frankly as I've said before on these calls it's about a three quarter delay from where we want it to be in terms of transitioning those clients over we've now transitioned over.
We're very successfully three of the five.
Blocks of business with two remaining that'll be completed by the end of the second quarter and the reason that's so important is it although it did generate higher expenses. It allows us to retain a lot of business and also to.
Be in a position to capture more revenue and as well as more revenue opportunities. It also allowed us to capture some expense synergies. So again hats off to Renee and her team for really good execution here, but I'll have Renee speak specifically to your revenue questions Humphrey Yeah, absolutely and thank you for the question Humphrey.
<unk>.
So first off of our ability to work directly with the plan sponsors.
On revenue synergies.
It increases as those clients begin to roll over to our platform.
But generally speaking there are several opportunities for us to add to the revenue and to capture synergies in the first area that I would point to is our very broad total retirement solutions offering so and you've heard us talk about this before we are strong not only in <unk>.
<unk> contribution, but number one in defined benefit number one in aesop of number one of non qualified in terms of number of plans. So one of the areas that we look at right of way is what additional solutions can we bring to the table for those planned sponsors and deliver in a very integrated and coordinated way. So we've seen.
Some good early success in bringing particularly defined benefit capabilities to the table as well as nonqualified.
The second area that I would point to is in the IRA rollover spectrum and there again, we have a very strong IRA I, Oh, excuse me I or a rollover capture capability and as those participants come onto our platform and we have the ability to work within that.
Benefit event will begin to see the results of that and it creates a nice lift to proprietary asset management flows the.
The next area of course of the small a small amount force outs, which is the benefit to the bank and then last of all we work with the fiduciary committees at each of our plan sponsors to identify opportunities to introduce our proprietary asset management capabilities.
As they make sense and that will be something that continues to unfold as this block of business, Mike grade silver So we're off to a strong start.
With a lot of runway left as that block of business, Mike grade silver or follow up of Humphrey.
Yeah sure. So just see on the kind of IRA fees.
And in terms of the flows. So clearly you start off first quarter of very strong I think of the on the outlook call you talked about all of the expectation for flows for 2021 would be flat for the year.
Given the the strong performance in the first quarter did that change your outlook for the balance of the year or were those two kind of loss of case wins were kind of expected India will cause of it.
It didn't change it.
Yeah Humphrey that's the that's a great question and let me tackle that by walking through each component of the net cash flow formula. So first off in terms of transfer deposits. We've already talked about the fact that we're seeing really good momentum in both pipeline and in sales across.
All plans segment.
And we anticipate that that will continue throughout 2021 and that we'll see good quarter over quarter increases in sales. So good good momentum in the transfer deposits. The same thing is true with recurring deposits.
We saw 10% increasingly true recurring deposits in first quarter.
Driven by increases in the number of people who are participating.
As well as a nice uptick in actually the match and the deferral of contributions themselves and as a reminder, as the IRT block migrate over to our platform.
The recurring deposits will begin to increase as a result of that IRT business now being on our platform.
Which brings the spin to withdrawals and we're seeing a really interesting phenomena of this year and it's related to the strong market appreciation. So let me cover that just real quickly.
We expect to see account values depreciate over 30% in 2021, and it's driven as a result of equity market performance.
And we will also see participant withdrawals from the IRT block of business show up in our block and it will and it will go through the participant withdrawals as well so as the result, when you look at the dollar amount of withdrawals, you'll see that increase over 2020.
But if you can if you.
Compare those dollar amounts of withdrawals to the average account values, what you'll see is that we expect our results will be at the pre pandemic levels, which is very favorable.
So as the result of this this is what led us to guide towards a flat net cash flow in 2021, and our outlook call.
We're certainly very pleased with what we've seen in first quarter.
And so that gives us nice optimism for the rest of the year, but it largely depends too on the pattern of the large client sales that we might see for the rest of the year that was a long explanation that hopefully that helps them for it and it is in every time, we've seen the markets go up into the right. This aggressively it's the same pattern that emerge.
<unk>, it's just the opposite when the equity markets go the other way. So thank you next question. Please.
Our next question comes from Andrew <unk> of Credit Suisse.
Hey, Thanks, and good morning.
Andrew a little more.
Thank you and good morning can you hear me.
We can.
Great great. Thanks.
I'm thinking a little strategically.
And at the beginning of the call.
Moving to the individual life business.
To your SMB businesses, and I think income solutions.
Sales were great, but I'm wondering if you could elaborate a bit more on strategically how that business fits in with your RIS businesses et cetera.
How important is it.
Yeah. So let me give that a high level in the kick it over to Amy, but I would start with where we've always been which is our overall arching strategy our strategy as you very well no is the.
The SMB market and larger employers and we've bolstered dad and the acquisition of the Wells Fargo IRT business. We also know that some of those products that lie within the U S. I S serve as really strong vehicles for the funding mechanism for example, nonqualified deferred compensation those tax benefits.
Very very compelling also back to the core SMB strategy life insurance is used as we all know for buy sell and key person protection and you don't have to look much further in the last 12 months to have an appreciation for what a single mortality life can mean to of small to medium sized business. So.
That's where we have always anchored our thesis for being in those businesses. The same lies true. If you were to look at Renee spread business. When we provide guaranteed income for our customers and then of course you have to recognize the pgi manages a disproportionate percentage of those assets because the line.
For the general accounts, so it really is a comprehensive.
Business model that we have built and I'll have the Amy speak to our first quarter sales in her outlook in her her ideas as well Amy yes. Thanks for the question Dan you did a great job teeing this up and you've hit exactly the right point, which is worth.
We're happier with our life sales and gross numbers when they have of tied to the business market. The one of the statistics. We've provided over the last several years is how much of our life sales is tied to that business market. So that's going to be tied to a solution that we use the life insurance product to solve either an executive bench.
The fit or to solve some sort of an employer benefit issue, usually with business owner and executive solutions of sort of the basis of that the this first quarter. What was probably most notable is that we were at nearly 60 per cent business market sales and I would tell you above 50% is what we want to see we.
Want to tie in to provide great solutions and Dan talked about it in a tax efficient solution for things that we're doing for executives and plan, we intentionally tie into our retirement business is one of the pillars of Trs to provide great nonqualified solutions and to drive both volume and good quality solution.
And that we're also looking to do even more business and you've seen that reflected in our result in the business owner and the executive solution, we know that the marketplace and some of the returns on what I consider just the share of retail plays are difficult, particularly difficult for public can share but the.
Business market focus the tie into the other piece of the strategy has been a focus for us for years and that's the piece that we continue to see as really critically important to the strategy.
Hopefully that helps Andrew.
Very much so I kind of get that sense of the the integration and then.
It sounds like you know the IRT integration is going really well.
You said three of five blocks of by the end of the year.
It should be humming are you at the scale and position, where you want to be or could you could you find other businesses.
And in RIS that you'd like to acquire.
It's like a lot of things.
It's opportunistic in some sense, but at the same time, we definitely have a to do list and its surrounds itself around capabilities, whether it's asset management or asset gathering around the world and so we've thought through that.
We need to digest, what we've acquired in the IRT business as I said, we feel very good about what we have acquired and Onboarding. It with the successful completion by the end of the second quarter of the last migration. We still have some work then for the balance of the year on the the.
Trust and custody component.
But we're clearly.
No.
Consciously aware of the fact that this doesn't stay stagnant theres going to be winners and losers in this space and we're going to continue to distinguish ourselves as a net winner and we'll be very strategic in how we go about doing that so appreciate the question.
Thank you.
Our next question comes from the line of Erik bass of Autonomous research.
Hi, Eric I was hoping.
Morning, I was hoping to get some more color on the international organic growth drivers in a couple of regions.
Southeast Asia. It looks like you had record net flows this quarter. So was hoping you could talk about the drivers there and then for Latin America, clearly there've been some headwinds from COVID-19 and pension legislation changes.
Can you discuss some of the current dynamics there in the key markets.
Yeah, So I'll tag team. This one with the Deanna I'll take Latin American maybe the kickoff Asia to her.
As you know in all three of the Latin American countries, Mexico, Brazil, and Chile. They are all going through some form of pension reform you may have even seen last night, Eric the it.
The president Pinata actually.
Allowed for the third now distribution out of the of for a <unk>.
System, which will our A&P, which will.
Reduced by another 10% the account values of course that doesn't necessarily impact our revenues, it's calculated differently and Theres also some pension reform that's being debated about moving the required funding contribution from 10% to 16% and there is debate currently going on of which were part of the long.
With the industry on how that next 6% gets managed and the structures. The go round that Mexico has already achieved their their reform, we know that starting in 2023 through 2030. It will go up 1% per year going from 6% to 15%.
However, they've also modified in the current environment the fee structures and were allowed to charge. So we've got some near term pressure and we're making adjustments on expenses, reflecting that downward pressure on the fees that we can charge.
And then of course, we've got to be thinking about Brazil. As you know there are there are a lot of hurt right now with the COVID-19, that's a serious issue and in spite of that our joint venture with Brazil.
Bump out of Brazil holds up incredibly well.
We still enjoy roughly a 30% market share and we captured 37 per cent of all of the new deposits through February 20, <unk> of this year. So in spite of being having a tremendous amount of macro pressure in Brazil, you have to give that team of lot of credit for their ability to fight through it the last comment I'll make them.
Brazil is there has been a very conscious effort to migrate away from the significant.
Emphasis and focus that we have on fixed income to include other products multi mccargo is what is referred to and it's a balanced fund and we're working very closely with the bank and helping shift some of that fixed income into more of a balanced approach and then lastly, as you know we have clarity.
Sinclair to us as an asset manager of which we own 100% is actually doing quite well in spite of some of these other challenges so with that let me flip it over to Deanna to talk about southeast Asia, Yes, Thanks, and thanks for the question Eric So first of all of this forgive me a little bit of backdrop the.
The economic outlook and in Southeast Asia is very similar to what we see here in the U S. There's a lot of liquidity in the market economic recovery is well underway a better outlook regarding the pandemic given the vaccination progress and we've continued to have very strong investment performance.
From our joint venture and as you know we increased our ownership of that joint venture a few years ago.
So that's coming into play as well the net cash flow for the quarter was very strong at $900 million.
<unk> has driven by written by institutional half driven by retail very focused in our equity funds.
There can be some lumpiness of that institutional money from quarter to quarter, but we do continue to remain optimistic about the net cash flow outlook for the remainder of the year.
Thanks, Dan and Jay can you follow up there Eric.
Great No I appreciate all the color there that's helpful. And then one Deanna you had mentioned in the prepared remarks exploring some ways to offset the low Io, we are right and the impact on our I.
I was hoping you could provide some more color on what options you may have there and the potential benefit.
Yes, Barry good why don't have Renee do that she is certainly close to that and again they've done a nice job navigating this but rene please yeah, absolutely Eric Thank you for that question. So.
We've talked a lot about the I O. We are rates in the decline and how that the impact that that's had on revenue and so we've been eager to identify opportunities to present solutions to our customers that.
Our attractive and they can help.
Create a better economic scenario for us and so we've been working very closely with Wells Fargo. We've identified solutions that are leveraging the strength and the capabilities of our bank.
And that can deliver what we think are some very attractive alternatives.
To this customer base and again this is for the trust and custody.
Custody customers in that block of business will migrate over at the tail end of the migration. So the very last part of summer and so as.
As we introduce these alternatives to our customers, we would anticipate to see some of some revenue replacement.
The begin to come through at the tail end of 2021, and then on into 2022. Thanks Renee I appreciate the question.
Thank you.
Yeah.
Next question comes from the line of Ryan Krueger of K B W.
Hey, good morning, everyone.
My first question was as the business starts to.
Migrate over.
To the new platform in retirement can you just help us think of little bit more about the how to think about the trajectory of.
Of the expense saves and the TSA is growing as we as we go through the rest of the 2021.
Yeah, Ryan happy to do that and I'm going to call an audible here because I know, we're probably giving a little bit longer answer. So I'm. One of maybe go to one question per analyst. So we can get through the whole queue in the interest of time and again that's on us so even even in spite of having short for prepared comments.
Our answers here have been a little bit long this morning, but what that I'm going to of Renee speak specifically to the issue of the migration and the expense relief yeah, absolutely and.
As we said the migration is going very well and we're very pleased with the the way the customers are being migrated in a very smooth fashion, good communications with advisors and consultants and specific tier two of your question.
We will see the TSA expenses began to roll off the last half of 2021.
Which led us to guidance at the outlook call to say that.
We will see the margins began to increase in the 23% to 27% margin range towards the latter half of the year, reflecting the fact that those expenses are coming off.
Thank you and I appreciate the question Ryan inside the limited to one so if the operator could take us to the next call. Please.
Our next question comes from John Barnidge of Piper Sandler.
The industry participant on the life side, albeit targeting the lower income stratification recently noted increased experience and depth of despair and their mortality book and then also an increase the impact from the lack of medical treatment for heart in Alzheimers disease can you talk about what you're experiencing.
<unk> seen with this dynamic in general mortality trends beyond the COVID-19. Thank you yeah, Yeah happy to do that John So Amy Please yeah sure. Thanks for the question John and so we saw the same reports that that you've seen in terms of some of the things going on beyond direct COVID-19 experience and what I can tell you.
<unk> is we've taken a really hard look at our individual life block as well as our group life block and keep in mind, we probably feel like we have the best point of claim data for our individual life blocks of that tends to give us the deepest insight into what the causes were and as we look through our portfolio.
Of <unk>.
Products and customers what we're seeing on those claims is that we don't see anything beyond normal volatility. So I appreciate that there's a larger discussion going on out there. Some believes there's few should see fewer deaths non COVID-19, there's other people coming in and saying Theres more desk non COVID-19, what I would say is for individual disability.
D as well as the group life right now those are both relatively unremarkable for us. So we're not seeing claims patterns that would be on of diagnosis code basis anything that's remarkable. So again, we like the fact that that's not remarkable but we understand that's a little bit different than what you might be hearing in the rest of the industry.
But that has been our performance.
Thanks, John for the color I appreciate it for the question.
Our next question comes from Sydney come off of the city.
Thanks, just a question on.
The acquired Au a if we look kind of sequentially.
It's about a $31 billion drop.
In that balance despite the fact that markets were pretty strong and I didn't think that there was any transfers into RIS fee. So is that just increase the lapse Asian activity or is there something else that's kind of driving a bigger delta than we've seen in recent quarters.
Yes, thanks for the questions for me please.
Please yes.
Yeah, Thank you for meat and and.
To your point.
Fourth quarter, a UA ended at 685.
And now we're at $6 54, and there are a couple of things that led to that first off market depreciation of that helped to drive that up but then that market out of.
Appreciation is being offset by the normal shock lapses that we had projected and those shock lapses are predominantly in the trust and custody side of the house.
But that is the impact there.
Hopefully that helps.
Thanks.
Okay. Thank you.
Our next question comes from Tom Gallagher of Evercore.
Hey, good morning, just.
For you.
Questions on RIS fee, so I'll just ask them all at once.
Do you do you expect to still breakeven.
On flows after the very strong start to the era of just I just wasn't entirely clear on that.
And is that it sounded to me like that was partly related to the IRT assets, which I guess I don't think the bulk of those are currently included in RIS fee.
So would you expect to begin to include those.
The next quarter or three Q.
We would see.
More of a complete picture of net flows and then finally.
They are pretty big outflows in the IRT that youre not currently including net worth than going to see included.
While we have a more complete picture.
Thanks.
Yes, I appreciate that plays Renee, Okay. So, let's first look at the IRT business and how that migrates over.
The IRT business comes over it will be recorded and acquired operations underneath the account value roll forward. So it does not come in through the net cash flow in terms of transfer deposits.
But where it does impact net cash flow is the IRT blocks of business will show up in recurring deposits.
And it will show up in withdrawals, so back to that comment earlier about just the 30% plus increase in account values that we expect to see.
From last year to this current year will impact the dollar amount of withdrawals.
Then to your question about do we expect to see flatness net cash flow. So what are we expecting to see for the remainder of the year certainly we're very pleased with the results that we see of net cash flow for the first quarter.
And our.
Our.
The remaining quarters, the net cash flow that we see there will be dependent on if we're successful in winning additional large plans and theres some volatility to that but we're certainly very positive about first quarter.
And and we believe that we'll see some lift in net cash flow as a result.
Tom did I get it done.
It did and just just to be clear will the bulk of those assets.
The showed in the roll forward into Q3 Q.
The retirement will show up in Q2.
The trust and custody would be.
Go ahead, yeah, the the retirement business shows up in Q2.
And then the trust and custody migration.
<unk> is slated for September.
Later.
Great. Thank you.
Thanks, Tom.
Our next question comes from Josh Shanker of Bank of America.
Okay.
Yeah. Thank you very much for taking my question.
If we go back a year ago and when people were.
Embracing a COVID-19 mentality, where there are shifts in the strategies that our people were wanting pgi to use like where did the certain funds.
The inflows other saw outflows are we seeing that again right now in the reopening and the change in the outlook and does principal have enough variety of strategies to embrace the needs of all of its customers where do they have to go elsewhere.
And I was like the perfect question for Pat and one that we've been discussing internally of with a great deal of fashion So fat.
Josh Thanks for thanks for the question first maybe just to sort of set the stage of lot of it if you look at our mutual funds or Etfs offerings.
Of 80 offerings at around 36 of those are in four and five star Morningstar rated funds. So I think when it comes to our confidence in providing a strong diversified offering to any macro environment that of client faces I think we're very well positioned whether it was in March of 2021 of its April of 2000.
21, and as you know Josh for has been significant rotation going on in the last.
Last two quarters, if you think about sort of the rotation in the fourth quarter, starting from the low quality of high quality growth to low quality growth of low quality.
The is coming into Vogue cyclicals, we've been able to continue to I think provide very strong I think investment capabilities to that sort of change in the equity markets and then in terms of our fixed income suite. We continue to have very strong capabilities in terms of people wanting yield yet, but not wanting to be in treasuries and sovereign credit and take that interest rate exposure and have that here.
So I think we feel very good about our public listed abilities and more pronounced I think as we go for we feel very good about our private real estate capabilities and we are seeing a continued sort of increasing focus today, Josh as we come out of this pandemic in terms of what investors are seeking in terms of alternative.
Tips, and private asset classes, and our private debt capabilities, our real estate capabilities seem to be gaining a lot of traction that's probably the most noteworthy I think today in terms of post COVID-19 that we are seeing different versus maybe in the thrust of the COVID-19 in March of 2020, I hope that helps.
Oh, I think that's useful I'll come back to John later in the and get a little more detail, but I know you guys want to get more question. Thank you.
Yeah. Thanks, Josh, Yes, we will dive into that as deep as you want to go.
Our next question comes from the line of Tracy then the agree of Barclays.
I know, we're going to learn more in June about strategic priorities, but I couldn't help but notice that your guidance for full year capital deployment of one place for that one 8 billion, including 600 to eight.
$100 million of buybacks has not changed but you did mention that credit trip expectations are now of 100 million down from 300 million. So I'm wondering if your capital deployment targets, perhaps maybe scale. It can you see the potential range of that in light of the healthier credit trajectory.
Yes, very good it's a good question and one that obviously the we're talking about in conjunction with our strategic review, let me ask Deanna to provide her thoughts here yeah. Tracy obviously, the the impact of the ongoing strategic review has some impact on whether we would increase our capital deployment out of.
Look or change that as we go forward and I'd say, we'll continue to update that as we go forward and you know obviously, we were a little bit shy of a run rate that would get us to the one point of Florida. The one eight in the first quarter, but again.
They were still on pace to be within that and then as we go throughout the next few months, we will continue to work with our board and the Finance committee to determine how we think about our capital deployment plans for the remainder of the year and as those change will communicated at that time. Thanks.
Thanks for the question Tracy.
Our final question will come from the line of Brian Meredith of UBS.
Thanks, guys. Good morning. This is Mike Ward just on the proposed tax rate changes in the U S. I was wondering if you had maybe on the estimate on what could be your operating tax rate. If the rate was taken up to 28 per cent and on the same theme do you think changes in capital gains tax rates.
In fact demand for certain products across your platform. Thanks.
Well, we're certainly evaluating all of the the various tax proposals as you very well know Theres no decision has been made and we're looking at all of those as it impacts our business is both here in the U S as well as international and other than planning for and looking closely at what the proposals are in of course.
We have our own efforts on Capitol Hill to lobbying on behalf of the principal in our and our shareholders and our customers and as part of the trades to get responsible.
Tax policy that does not hamper our ability to help our customers reach financial security. So any thoughts of we have would be pure speculation at this point, Dan anything you want to add to that yeah. The only thing I would say is.
The Devil's in the details of it and there's different impacts of across the us and if you went back to when the the effective tax rate went down.
Obviously.
Some under non underneath.
<unk> of that the that didn't all translate into the effective tax rate and so again, that's the headline rate but of the Devil's in the details of how some of the other components happen I'd also say that you know obviously it can cause the remeasurement of our deferred tax liabilities as it did back with the last tax change and.
Could have some potential change in required capital as the tax rate changes as well and so again, the statutory balance sheet implications as well as just the income effective tax rate that you discussed so more to come as we find out more you know at this point, it's tough to know when it will happen.
And to what flavor it will actually look like thanks for the question Mike.
And we have reached the end of our Q&A Mr. Houston Your closing comments please.
Just just real quickly I would just simply say, we feel really good about the quarter there was.
Clearly some recovery in the U S and southeast Asia with regards to COVID-19, but businesses are opening back up again and there is an historically been low unemployment, which leads to an.
In some cases wage inflation, but we what we see is hiring happening amongst small to medium size employers and large employers and so all of those macro events helped drive propel our businesses. We feel good about the position that we're in and frankly feel very confident about the balance of the year a couple of important day.
<unk>, our shareholders' meeting on May the 18th of nine o'clock in the morning Central and then the although the time has not been set we will have our investor day on June 29th where we'll talk in more details with regards to our strategic review and we look forward to showcasing those for you in the meantime, we're going to continue to execute on our strategy and deploy capital in.
The responsible manner, so with that have a wonderful day and thank you for your time.
Okay.
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