Q2 2021 Principal Financial Group Inc Earnings Call
Good morning, and welcome to the principal financial group second quarter 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 and then the number 1 on your telephone keypad, we would ask that you be respectful of others and.
And limit your questions to 1 and a follow up so we can get to everyone in the queue.
I'd now like to turn the conference call over to John Egan, Vice President of Investor Relations.
Thank you and good morning, welcome to principal financial Group second quarter 2021 conference call as always materials.
Related to today's call are available on our website at principal Dot Com Backslash investor.
Following a reading of the safe Harbor provision CEO, Dan Houston, and CFO, Deanna <unk> will deliver some prepared remarks.
Then we will open up the call for questions.
Others 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 company does not revise or update them to reflect new information so.
<unk> events or changes in strategy risks 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.
Sequentially.
Reconciliations of the non-GAAP financial measures to the most directly comparable U S. GAAP financial measures may be found on our earnings release financial supplement and slide presentation.
Dan Thanks, John and welcome to everyone on the call. This morning, I will discuss takeaways from our 2021 investor day key performance highlights.
<unk> second quarter, and how our growth drivers continue to deliver results in fuel momentum across our integrated and focused portfolio.
Anna will follow with additional details on our second quarter results, our progress against our financial targets and our current financial position.
Turning on slide 5 our recent Investor day, we announced the results of our strategic review.
<unk> food in the areas of our business that we will continue to invest in and expand on as well as select markets and products, we will exit and we shared how these priorities enabled us to reach our financial targets and deliver against our strengthened capital management approach.
Our result in go forward strategy is focused on our growth drivers of retirement in the U S and emerging markets global asset.
Englishman and U S benefits and protection. These businesses offer the greatest opportunity for growth leverage our differentiators and integrated business model and meet our financial objectives of being more capital efficient with higher returns, we're exiting U S retail fixed annuities as well as the retail segment of U S. Individual life and we are seeking transaction.
Asset management for the related in force blocks, allowing us to free up capital and Derisk. Our portfolio. We are focused on executing on the transactions and expect they are actionable in the near term. These moves will better enable us to achieve our financial targets, which include delivering 9% to 12% annual growth in earnings per diluted share from 2020.
<unk> 2023.
Achieving a 15% return on equity by 2023, and generating free capital conversion of 70% to 80%.
And lastly, we outlined our plan to return more capital to shareholders totaling $3 billion between 2020, 1 and 'twenty 'twenty..2 this does not include.
Include any excess capital that may be generated from potential transactions bottomline the changes to our business portfolio and capital management strategy will drive future growth reduced capital intensity improved risk profile sharpen our strategic focus and reinforce our commitment to returning more capital to shareholders all aimed at driving.
Wanted to long term shareholder value.
We are in a strong position to continue to create long term shareholder value and to grow meaningful ways for our customers and shareholders as evidenced by our second quarter results as shown on slide 6 we reported $467 million of non-GAAP operating earnings in the second quarter excluding significant.
<unk> variances earnings increased 21% over the second quarter of 2020, driven by continued execution of our long term strategy and improvement in macroeconomic conditions in many of our markets.
We closed the second quarter with total company AUM of $990 billion, including record Pgi managed day.
AUM and more than $130 billion of institutional retirement and trust retirement assets that migrated over the last 9 months.
Total company net cash flow was a positive $2.1 billion in the second quarter, including $1.6 billion of Pgi managed net cash flow.
Our growth drivers continue to deliver performance for the enterprise.
Generating strong earnings growth and creating long term value for shareholders.
And our U S retirement business the underlying fundamentals remain strong and are fueling growth in the business reoccurring deposits increased 33% over the second quarter of 2020 with more than half of the growth coming from our legacy block and the remainder from the IR.
A R T migration.
Participant withdrawals were 2.4% of average account values in the second quarter in line with our historical average and lower than the 2.8% we experienced a year ago. During the pandemic. However, as a result of strong equity markets participant withdrawals increased $3 billion over the second quarter 2020.
Price is consistent with prior periods of strong equity performance and the opposite is true when equity markets decline. These withdrawals led to negative net cash flow in RIS fee of $400 million in the second quarter is the strong growth in sales of reoccurring deposits as well as the low contract lapses were offset by higher dollars of participant withdrawals.
This we completed the migration of the IRT retirement business during the second quarter as we discussed at the Investor day, the migration of the trust and custody business will be completed in the first quarter of 2022.
Over the last 9 months through the IR team migration, we've added 2.4 million retirement participants and 140 billion.
The draws of account value to our platform increasing scale driving growth and positioning principal as a top 3 retirement provider the strategic benefits of the acquisition continued to emerge including revenue and expense synergies, we're beginning to see lower TSA expenses increased proprietary investment management opportunities.
Greater.
In dollars, the rollovers and expanding retirement plan in total retirement solution opportunities. Our sales pipeline has nearly doubled over the last year with the strongest growth in the large plan market, which we expect to largely benefit sales in 2022, and the RIS spread business, we had approximately $750 million of MTN issuance in the second quarter.
Her ire and $500 million of pension risk transfer sales. The PRT business continues to be a core offering of our total retirement solutions and we remain disciplined in pricing to ensure opportunities meet our return thresholds looking forward. Our U S retirement business has 4 key growth engines, which we referenced at Investor day momentum from the IRT.
Shouldn't differentiation from an unmatched set of total retirement solutions and engaging participant experience evolving with more digital enhancements and Pgi is world class investment management solution. These 4 powerful engines will drive future growth for our retirement business as well as the rest of the enterprise outside the U S.
Our emerging market retirement, and long term savings business is facing near term challenges from macroeconomic conditions and the pandemic and Chile second quarter AUM was negatively impacted by $1.6 billion of Covid related AFP hardship withdrawals as the country approved a third wave of withdrawals during the quarter.
As a reminder.
Acquisition not impact our revenue in Chile as fees are collected on salary not AUM principal international reported flat net cash flow and $167 billion of AUM in the second quarter, a 7% increase on a constant currency basis compared to a year ago, China AUM, which is not included in our reported AUM was.
It was $143 billion in the second quarter and was pressured by negative net cash flow from institutional money market funds.
Despite these challenges we have the competitive advantage needed to drive growth over the long term within our chosen markets.
We have strong local and global investment management capabilities, the right joint venture partners.
With meaningful reach distribution and brand recognition locally and a digital strategy that allows us to access and service customers, where they are we continue to diversify our offerings in principal International for example, in Brazil, Our multi America day funds balance funds and investments in equities or fixed income had become more attractive due to the decline in interest rates.
At the end of the second quarter. These funds accounted for over 20% of AUM in Brazil Prep with 28 billion Brazilian Reais of net cash flow year to date, we've captured 54% of the market share and 55% of second quarter sales were in these funds.
Emerging markets are a long term investments.
We're well positioned to navigate the inherent volatility that comes with doing business in emerging markets will continue to capitalize on our competitive advantages by offering higher value added products and differentiated solutions to our customers as well as leveraging our global asset management capabilities to drive future growth in principal international.
Our global asset management business is driving growth and demonstrating the strength of our integrated operating model in the second quarter Pgi delivered $1.8 billion of source net cash flows of 45% margin strong pre tax operating earnings as well as record Pgi managed AUM of $532 billion in.
In Pgi sourced au AUM of $263 billion and we continue to deliver strong long term investment performance is 70% of principal mutual funds Etfs separate accounts and collective investment trusts were above median performance for the 3 year period, 74% for the 5 year and 88%.
Sent from the tenure this performance positions us well to attract retain assets going forward and is contributing to positive net cash flow. We're continuing to see strong interest in our flagship real estate products and continued demand for our yield oriented products, including preferred securities high yield and are scaling emerging market debt strategy together.
Our strength in high growth investment capabilities, our ability to leverage principal global multichannel distribution to develop and deepen customer relationships are highly efficient globally integrated operating model and our ability to attract and retain top talent will continue to drive growth in our global asset management business.
And U S benefits from protection are small to medium size business customers continue to show signs of resiliency and who are returning to normal sales levels expected retention levels and positive in group growth and group benefits trailing 12 months in group growth turned positive for the first time since the pandemic increasing nearly half a.
A percent for the total block with the strongest growth in businesses with under 200 employees, our focused customer segment.
In individual life premium and fee growth increase reflecting very strong nonqualified corporate owned life insurance sales, which are critical to our business market strategy and our total retirement solutions offering.
Our latest well-being index reiterate the strength of this market, 57% of small to medium size businesses that responded to our survey said they are optimistic about the overall economic outlook for the next 12 months. This is a higher level than before the pandemic began as he continues to be a priority for principal as highlighted on slide 7 our.
We approach is aligned to the United Nations sustainable development goals.
It is woven into our investment philosophy is our approach to diversity and inclusion and is embedded in our philanthropic strategies.
We've recently published specific ESG commitments and will provide continuous updates to our sustainability website on principal dot com.
E S for annual corporate social responsibility report, we're very optimistic about the opportunities that lie ahead as momentum has returned in many of our businesses and we've evolved our portfolio to bring greater focus to our growth drivers data.
Thanks, Dan Good morning to everyone on the call. This morning, I'll share the key contributors to our financial.
And our <unk> for the quarter, our current financial and capital position and additional details on how the outcomes of the strategic review will drive improved financial results.
Net income attributable to principal was $362 million in the second quarter, including $106 million of net realized capital losses.
Losses with $5 million of credit losses.
We reported $467 million of non-GAAP operating earnings in the second quarter or $1.70 per diluted share excluding significant variances non-GAAP operating earnings of $453 million or $1.65 per.
Oh, perfect share increased 21% compared to a pressure in second quarter of 'twenty 'twenty.
This is also a 14% increase compared to the pre pandemic second quarter of 2019.
As shown on slide 8 we had a number of significant variances during the second quarter.
They've had a net par.
Diluted impact to reported non-GAAP operating earnings of $10 million pretax $14 million after tax and 5 cents per diluted share.
Pre tax impacts included a $61 million benefit from higher than expected variable investment income.
$15 million benefit from.
Positive DAC amortization in RIS fee and model refinements in individual life.
And that negative $11 million impact from Covid related claims a negative $21 million impact from IRT integration cost and a negative 33 million dollar impact in principal international including a.
A negative 24 million dollar impact of inflation in Brazil.
And $9 million of lower than expected, Inc. High performance in Latin America.
Details of the Brazil inflation impact are available on slide 20.
The second quarter financial impacts from Covid, we're limited to mortality and morbidity.
Ability in RIS spread and U S insurance solutions with just over 50000 U S. Covid related deaths in the second quarter. The net $8 million after tax impact was higher than our rule of thumb, primarily due to a large claim in individual life.
This is a significant decline from prior quarters, and we expect the impact will be relative.
Relatively immaterial to our results the remainder of the year.
Looking at macroeconomic factors in the second quarter, both the S&P 500 index and daily average increased 8% compared to the first quarter and the daily average increased 43% from the year ago quarter benefiting revenue AUM.
AUM and account value growth.
N R. S V M P G I.
Foreign exchange rates continue to improve in the second quarter, but remained a headwind on a trailing 12 month basis impacts to reported pre tax operating earnings included an immaterial impact compared to first quarter 2021 a positive $13 million compared to second quarter 2020.
<unk> and a negative $14 million on a trailing 12 month basis.
Turning to the business units my following comments exclude the impacts of significant variances as Dan mentioned, we completed the migration of the IRT retirement business in the second quarter and we are seeing the benefits begin to play out in.
In our ESP we continue.
<unk> $55 million to $65 million of IRT integration expenses for the full year as we continue to work to integrate the trust and custody business.
P. J I benefited from strong management fees performance fees and disciplined expense management in the second quarter boosting growth in revenue and earnings and expanding the margin to a 45.
To expand pre tax operating earnings benefit of $11 million from performance fees.
Specialty benefits pre tax operating earnings declined from the year ago quarter due to higher dental and group life loss ratio is driven by severity corporate pretax operating losses were in line with expectations as higher 1 time expenses were offset.
Net by higher variable investment income.
Turning to capital and liquidity on slide 9 we remain in a strong financial position with $2.5 billion of excess and available capital, including $1.7 billion at the holding company more than double our target of $800 million to cover the next 12 months of obligations.
$325 million in excess of our targeted 400% risk based capital ratio estimated to be 421% and $460 million of available cash in our subsidiaries.
Shown on slide 10, we deployed $431 million of capital during the second quarter, including 2.
$266 million of share repurchases and $165 million for common stock dividends.
Through the first half of the year, we've returned more than $680 million of capital to shareholders.
Last night, we announced a 63 common stock dividend payable in the third quarter of 2 cent or 3% increase.
From the second quarter, our dividend yield is approximately 4% and we continue to target a 40% dividend payout ratio for the full year through the first half of the year the impact from credit drift in credit losses has been relatively immaterial and we expect it to remain immaterial for the full year.
This is improved from the 100.
Dollar estimate at the end of the first quarter.
As we discussed at Investor Day, the strategic review validated that our capital and leverage targets are appropriate we plan to return to our targeted levels by the end of 'twenty 'twenty, 2 including a 400% RBC ratio by year end, 'twenty, 'twenty, 1 and $800 million of excess.
Capital at the holding company by the end of 'twenty 'twenty 2.
We will continue to maintain a 20% to 25% leverage ratio and expect to pay down $300 million of long term debt when it matures in late 2022.
Between 2020, 1 and 'twenty 'twenty, 2 we plan to deploy approximately $3 billion of.
Of capital to shareholders to return to our targeted capital levels, including 1.4 to $1.8 billion of share repurchases and 1.3 to $1.4 billion of common stock dividends.
This excludes any impact of potential transactions through our refined focus on strengthened capital deployment strategy.
We will invest in areas, where principal has established competitive advantages, while increasing our returns to shareholders. We have a clear path to becoming a higher growth more capital efficient company, creating long term value for shareholders.
We are actively pursuing transactions for several in force blocks, including fixed deferred annuities.
And single premium income annuities with $18 billion of reserves and Universal life secondary guarantees was $7 billion of reserves.
While we don't have details to share on transactions. We will continue to update you as we know more including timing as well as our financial and capital impacts.
As a result of these portfolio.
Leo changes this results in approximately a $110 million of loss pre tax operating earnings on an annual basis, but we expect a 7% to 10 percentage point increase in free capital flow conversion and a positive impact on our return on equity as.
As we look forward, we are targeting a 9% to 12% annual growth in earnings per diluted share.
We have a path to a return on equity of at least 15% and we expect to generate 70% to 80% free capital conversion. These targets exclude proceeds from potential transactions, but reflect the lost earnings and capital impacts from discontinued products and segments. The path forward is attractive and will benefit returned.
And our risk profile. This concludes our prepared remarks, operator, please open the call for questions.
At this time I would like to remind everyone to ask a question press Star and then the number 1 on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Our first question will come from the line of Tom Gallagher with Evercore.
Good morning.
Dan I just had a first question is just a follow up to your comment about specialty benefits did you say the weakness in the quarter was related to 1 large claim.
In group life, and if so how large was that claim.
That's my that's my first question.
Yeah, Tom I'll comment and then I'll turn it over to Amy. This is he made more has more to add that comment was relative to the COVID-19 impact and.
And that we were slightly above our rule of thumb of.
$10 million after tax impact for every 100000 of U S deaths and that 1 large claim was in individual life.
That took us just slightly above our rule of thumb and so it wasn't a comment on specialty benefits that was a comment on the COVID-19 claims within individual life and total company.
Do you think further Amy no.
Tom.
Okay, Great and then my follow up is Dan.
A competitor a great West recently announced that it's acquiring proved 401k business.
And I guess my question is it surprised me a little.
Just because great west is still in the process of integrating their mass mutual block.
But you know obviously raises the bar in terms of scale by competitors.
I guess just in light of that transaction, just curious how you're viewing the market your scale.
Little bit still feel like.
Post the IRT deal.
You have sufficient scale for the next several years or do you think this raises the bar for you to consider future M&A and 401 K.
Yes, Thanks, Tom for the thoughtful question first thing I'd say is I, certainly like the valuation ascribed to the block.
A business I think that speaks volumes about our platform, which I would emphasize is inclusive of more proprietary asset management, we have a lot of success in roll ins and rollovers. We also have a lot of success around nonqualified deferred compensation and all the other drivers of our Trs business.
Do you still hold that hangs together really well the other comment I'd make Tom is that this thesis that apparently is out there in the marketplace is the rationale behind why we bought the wells Fargo IRT business in the first place, which was to gain scale gain access to additional distribution capacity.
Model.
Certainly create new capabilities and allow us to have a bigger footprint out there with distributors marketers intermediary. So frankly, we enjoy good scale today, we have good capabilities, we are constantly supplementing those and building on it from a from a digital perspective, but.
We've got a really good place to fight from at this point in time, so Rene anything you'd like to add on top of that question. Please.
Daniel Great job of covering exactly how we're thinking about it.
It's clear that the market will continue to consolidate and scale is important as our capabilities were.
We think really happy with the IRT acquisition in terms of what it did bring to us and does bring to us in terms of scale and increasing access to consultant channels that we may not have had before as well as really rounding out our set of capabilities to benefit not only the Iot customers that were acquired.
Our real estate customers as well so as we think about consolidation in the future and we're very mindful about the need to continue to watch our unit costs and scale if acquisitions make sense in terms of scale and capabilities will keep a close watch on those but we're happy with the acquisition.
<unk> that we made and we continue to watch the market very closely.
For the question.
Yeah.
Our next question comes from the line of Humphrey Lee with Dowling and partners.
Good morning, and thank you for taking my questions. My first 1 is on Pgi. So looking at the performance for this quarter or both.
<unk> Com and margins were very strong and you highlighted.
There is a component of performance fees, but even if you kind of back that out the margin still kind of around 44%. Just can you talk about the moving pieces for the strong margin from a quarter and how should we think about that in the near term, especially if the market conditions remain relatively.
Stable.
And it really was a really strong quarter across the board for Pgi couldnt be more proud of the team Pat you want to provide some additional comments and details here.
Thanks for the question I think 1 of the things that I want to highlight is that we've continued to see strong revenue growth because we have a strong investment capabilities and our desire.
In the marketplace and we're seeing the desire from retail from retirement and from institutional clients from a multichannel multi distribution model is really playing well with capabilities that are desired in the marketplace and I think that's been a nice sort of revenue generator for us as an organization. Both in terms of sales and in terms of retention in terms of the margin.
Arjun question Humphrey.
If the macro market and markets continue to I think cooperate.
We believe we're going to continue to generate I think the strong margins in the upper end of our guidance range of 37 to 40, and probably likely a little north of that 40% guidance range going forward.
As you kind of think about the.
<unk> controls, we continue to have in place and the organization and our sort of view that our capabilities will continue to be desirable in the marketplace and so I felt pretty good about the ability to continue to have some fairly strong margins in the second half of the year.
I think we may have a little bit of additional sort of from pharmacies on the margin in the second half and you're also.
But the margin outlook looks quite strong yet as I look forward into the second half of the year Humphrey.
Got it thank you for the color Mike.
My second question is related to specialty benefits I think.
N D. In his prepared remarks, you talked about day until you have some severity in the quarter I was just wondering if a meal deanna can talk about Mike.
Mike what you saw in the quarter and how has that trended into July.
Yes, very good question Avi. Please yeah sure. Thanks for the question.
So just to take a little bit of a step backwards. We always expect to see you do loss ratios in the first half of the year that are going to be greater than that second half of the year just in terms of how.
These benefits get utilized in the first quarter, we saw the type of utilization that we expected second quarter. We would have assumed we drew down on that a little bit in terms of frequency and severity than what we saw is frequency actually stayed pretty well within the ranges that we expected. It was severity that was a little bit higher so when we think.
Of severity for dental severity for dental is going to be the unit you were unit 3 procedures being done so something all the way from a bridge or a crown 2 of filling and so I think I think what we would say there is we have really great plan design features really great maximum features that tend to.
It sort of self regulating mechanisms on those plans. So even if severity comes up a little bit in second quarter, what we're going to see that second half of the year is that is going to come back down. So we're seeing a little bit more of those procedures and again I've heard lots of people speculate on what's causing that we don't tend to speculate as much as we tend to make sure our.
B pricing is aligned to what we're seeing in terms of the patterns and again, we have great access to a bunch of in network dentists, who give us some good insight into this so what we're saying is that second half of the year. We think it's going to return to normal those types of things like severity don't tend to keep happening in second in third and fourth quarter, because we've got planned design features.
Arbor's that are good self regulators I think we've got that advantage home free in addition to the fact that those businesses annually priced and coming out of a global pandemic I would expect some degree of volatility in our claims experience. So thank you for the questions.
Okay.
Your next question comes from the line of Andrew <unk>.
Feature with credit Suisse.
Hey, good morning.
Just maybe first layer onto Tom's earlier question about Scott.
Scale.
And multiples paid what we're seeing.
Huge multiples being paid in the emerging markets specialty benefits.
So maybe just along the same lines.
Do you feel that you've got scale in those businesses and if so when you do divest of the.
Decided.
Operations.
As I think you had cited over a billion and a half dollars or it.
I think as much would that more likely go to.
Share repurchases as opposed to acquisitions given the scale question.
Yes. So appreciate that you know 1 of the benefits we have just still being.
30 days out of having reported on our strategic review.
We then I won't reiterate all of what was said during the course of our Investor day, but we literally interrogated every 1 of our businesses our markets our look back and our look forward and so we do feel as if any gaps that might exist around capabilities.
And again the scale or are under our clear understanding and frankly, we feel like we're in a very strong competitive position across the businesses. The ones were exiting is where we didn't feel that the economics in our best interest relative to a go forward basis, and we felt there were other organizations.
And better owners of these of these assets, we need to complete these transactions before coming to a conclusion on how we will deploy those proceeds but we are on the record already with investors that for.
For the 2 year period of time, we're going to deploy $3 billion back in the form of dividends.
<unk> that were talked buybacks, we feel we've got our arms around our capital position. We're in a very strong position, which gives us frankly, a lot of Optionality I'll ask Deanna. If she has any additional comments you'd like to make here. Yeah. I think 1 of the things we did lay out at Investor Day is the fact that 1 of the reasons why we have a low leverage ratio.
Is it a it does allow us to fund any potential inorganic acquisition through the issuance of more debt.
As well as our strong free capital flow position allows us to use some of the near term free.
Free capital flow to also help aid in that so obviously, we're going to be active in looking to.
To see if there are organic or inorganic opportunities I think what Dan said is we feel good about the scale and the capabilities of our go forward growth strategies.
But we'll continue to be good stewards of capital. Our plan is to return that capital released from transaction unless there is a clear.
Value accretive opportunities.
Weighted in another way so hopefully that helps thanks, Andrea James follow up Yeah power there very helpful answer. Thank you.
I'm just curious now in RIS fee.
Now that you've brought the IRT.
On board sales 4.3.
$3.3 billion up from $2.8 billion year over year, just kind of curious now that it's all on board what kind of sales trends you will likely see.
As you are now expanding your reach into larger market. So could we see a big uptick in sales.
Yes, I think 1.
Look at that as you know will help frame that as we get fully fully integrated as we sort of set our targets here in 2022, I think it might be premature right. Your observation is a good 1 with regards to increase in sales from 2.8 to $3..3 I'd also remind you that embedded within those TGI numbers in terms.
1 way from our results we had another $3.8 billion of Dci O sales and so these strategies are working very well and maybe with that I'll ask Renee to talk a little bit about the markets that we have historically have not played in that will be additive to our existing distribution strategy for a day.
Andrew.
Andrew Thank you for that question because I think there is a lot can be said in terms of the organic growth that we're seeing within RIS fee.
So maybe starting with first quarter, you'll recall that in first quarter 'twenty..1 we had about $8 million in sales, which was an exceptionally strong result.
And include.
A couple of very large plan sales in there as well as strength in the small to medium sized market.
That indicates that we are we can and we will play in the large plan market. We are successful and we're winning then we turn our attention to the second quarter.
And.
What we see as a very strong $3.3 billion, which is up 17% from Europe.
From a quarter a year ago quarter.
Second quarter sales were really dominated by small and medium sized plans.
Which again speaks to the fact that we have strength in small.
Medium and large sized plans.
We communicated in Investor day, and in last quarter's call that we are seeing a really nice increase in our institutional our large plan pipeline.
And we're very pleased with that and it reflects the fact that we were making good inroads in relationships with top tier.
Our consultants.
The large plan market. However has a longer sales cycle. So we would anticipate that those sales will hit in 2022. So all said very pleased with the momentum that we see in organic growth, it's strong across small medium and large plan market.
And the we continue to be very optimistic about our capabilities and our ability to compete in this marketplace. Thanks, Andrew for the question.
Q.
Your next question will come from the line of Jimmy Buhler with J P. Morgan.
Hi, Good morning, So first just had a question on.
On investment performance and if you look at the data that you disclosed on your bonds.
It seems like the 1 year performance is worse than 3 or that's worse than 5 year and that's down from the 10 year. So just wondering if this is because of a few funds or more broad based and then what the implications of this.
Or in your ability to attract flows.
Hey, good bad please yes, thanks for the question.
In terms of our performance, we still feel very.
About our long term performance are 1 year has dropped off a little bit and specifically it dropped off in our U S and non U S equity performance.
As you know.
The U S equity markets in the first half of the year because of just a strong stimulus fiscal and monetary optimistic growth to.
The environment was really 1 of owning risks in that marketplace and you're rewarded for that.
Our sort of overall funds sort of approach is more it's not universal, but probably biased more toward higher quality.
And Laura Clague.
Higher quality than lower quality sort of a company's net.
And that's probably held back a little.
Performance, our investment approach process, we have a lot of conviction that will come back again, we've had periods in our past, where where we have from those risk on approach and our high quality low vol sort of style has been.
In our favor as we talk to our clients. They know our process. They know what they're they're investing in terms of our processes and feel very confident and comfortable with what we're doing so we have not seen any drop off at all in terms of either retention ourselves because of that so that's probably the most important part of the sort of a if you want to say less drop.
<unk> off a little bit of a drop off in performance, it's been Jimmy follow up.
Yeah, and then on the international business your flow seemed weak across a number of regions. So if you could just talk about that and then also on that.
The Chilean pension market given how the election has gone thus far how do you feel about sort of any potential.
Pension reform there.
Yeah, all good questions. So the first place I'd start is in rugs relative to P. Pi net cash flow I think it was a challenging quarter, but frankly on a trailing 12 month basis, you've got $4.4 billion of positive net cash flow that's 3 percentage 3 percentage.
Beginning of year account.
Balances, it's up 10% compared to the trailing 12 months second quarter 2020, and that's up 25% on a constant currency basis I could get into the details, but examples might be for example last.
We saw a $900 million positive and southeast.
Asia in Malaysia.
Negative 300, this quarter entirely attributable to an institutional money market fund moving in and moving out so again when.
When we look at our long term equity strategies across the board that we are actually holding up really well in these very market. These these marks.
Markets and where there is downward pressure some of that of course is coming from they are frankly still struggling from an economic recovery perspective in large part due to global.
Some of what's happening here in the U S. So at the end of the day, we still feel we've got a really strong position as you could see when you adjust OE for and kind of.
Inflation in the Chile variable investment income.
It's a good result for Pi and still retaining 32% margins as it relates to the Chilean elections. That's that's interesting a couple of candidates who are challengers here have what I would consider and categorized as more moderate approach.
<unk> to AFP reform.
Obviously, we're involved and engaged in talking about those topics with.
Regulators on the value creation to chill.
<unk> and citizens and how the AFP system has actually worked quite well, it's frankly, what's allowed them to use as a funding vehicle as they.
Price these are 10%.
Withdrawals coming out of the AFP system. So we've got a lot of work to do to continue to inform legislators inform the public.
Is there a concerted effort to do that it has served that people that are well in the past and we believe it's still survive going go.
<unk> as you know we will have a first round of elections in November 2nd round of elections in December and we will continue to be vigilant in making sure that our point is made relative to the strength of the AFP did that help.
Yes. Thank you.
Youre welcome. Thanks for the thanks for the question.
Going forward. Your next question comes from the line of Ryan Krueger with <unk>.
Hi, Thanks, Good morning, I just had 1 quick 1 in terms of the guidance that you had given at the Investor day at the 9% to 12% EPS growth.
I know you included granted overhead.
Food anything or lost that you earned on the general account assets that would be reinsured within pgi.
Yeah, Yeah that was included Ryan.
So the last piece on day were included in the 9 to 12 month Yep.
Okay.
That was all I had.
Oh, Thanks, Brian appreciate it.
Next question. This question comes from the line of Erik bass with Autonomous research.
Hi, maybe just a follow up on Ryan's question on the EPS growth guidance.
Continue to get some questions from investors. So just wanted to clarify that we're looking at it correctly.
But I think you are starting from a base of $5.67. In 2020, then assuming 9% to 12% growth, which would imply a range of roughly 735% to $7.95 for 2023.
I believe the growth rate assumes the $110 million pre tax drag from lost earnings from the businesses you are exiting.
Okay, Thanks, and Youre not assuming any benefits from redeploying that capital. So I guess first do I have that baseline correct and then if so should we assume that a sale of the fixed annuity <unk> SQL blocks would be accretive to your EPS growth as you redeploy the proceeds.
Yeah.
You are correct and.
Just following up on that last question from Ryan. It also included an estimate around stranded costs and Pgi lost revenue from the general account obviously those last 2 items are estimates and they would be dependent.
It dependent on the specifics of the transaction.
But you have that.
And so again relative to that guidance there could be some upside relative to the deployment of the proceeds from the transaction obviously the magnitude of that will depend on the process and the specifics of the deal.
But again that.
The confusion was probably that I made a comment slightly dilutive slightly dilutive was not relative to that outlook. It was relative to a V. A U.
Resolved that obviously would be hindered by that lost earnings that I just discussed.
Eric does that help guide are clear on that 1.
Right, Yes. Thank you that helps and then maybe the follow up on it could you give a sense of what you're assuming for growth in the RIS spread and individual life businesses in your guidance and should we assume that earnings from these businesses are flat or maybe even down over the period given the planned product exits from the stranded costs.
Yeah, what I would say there is standard costs are not just in those lines of business. They go over in the Pgi and they actually go across the entire enterprise.
The reason we didn't go into a walk forward on those 2 lines of businesses as well as obviously corporate is those are the ones that are going to be impacted.
And by the transactions and likely what we expect to see somewhat of a reset and then a growth that would be more typical from what we have seen up to this point and so again I think that's 1 that will give you more insight as we transact in as we go forward.
But again.
Yes.
The 3 that we didn't give you specific guidance are rolled up into that 9% to 12%.
But that's how I would think of it as somewhat of a reset and then growth from there.
Perfect. That's helpful and so just take out the $110 million is a fair.
Assumption.
Got it thanks, Eric for the question.
Your next question comes from the line of John Barnidge with Piper Sandler.
Thank you very much.
Can we talk maybe a little bit about the pgi in the equity product because I look at the withdrawal activity.
Experience it looked like it was the lowest level since 2016 and clearly the turnaround in equity flow has really helped pgi. There can you maybe talk about what youre seeing from a withdrawal activity perspective, as well as your expectations going forward. Thank you.
Perhaps some insights.
So John Thanks.
Thanks for the question I think on the on the institutional side, we're actually seeing positive net cash flow on the equity side.
Some small cap.
International small cap international too.
2 notable areas.
We're also I think I, even mentioned in our Investor day discs.
Origin, which is 1 of our emerging market investment boutiques, who has had some very strong sales growth and they continue to attract some institutional sales activity. So the institutional side. The the the activity looks quite good on the equity side I think what you're probably referring to John is what youre seeing maybe within our platforms platforms, we are seeing somewhat draw.
Raws within the day.
The mutual fund.
Particularly the mutual fund, we're actually seeing some I think.
On a broader sort of commentary, we're seeing actually some positive with net cash flows and in our international wealth, Dublin platform and our SMA sort of product line, specifically with alliance.
<unk>, which is a very strong.
Sort of mid cap large cap manager.
So it's going to be a mixed bag in terms of mutual funds, but.
We still believe we have a very strong lineup of equity capabilities across the different segments that we cover John.
Follow up John.
Yeah, great. Thank you for the answers.
During the day at Dan a follow up maybe on the specialty benefit side and the increased loss ratios of dental and vision in the first half of the year can you talk about addressing that from a pricing dynamic on renewal and how you're maybe thinking about whether this can lead to more regular frequency than pre pandemic. Since we all suddenly became aware dentist offices could be close on the long.
Long term basis.
And we pushed yes sure happy to give an answer to that.
So I think Dan mentioned that at the tail end of the question that we took before but that is that the dental business is 1 of our highest product lines in terms of annually renewable so when we look at those things that are going to be naturally.
Price every year, that's going to include dental we do trend we do look on trend on a regular basis, we do a lot of regular pricing scrutiny in fact more than once a year probably on more of a quarterly basis to look at our our dental prices exactly what they need to be in the marketplace. So the good news there is.
Replay the brokers and employers who have those products are used to sort of that regular cadence and so what I would say, we're seeing first half of the year, though isn't probably indicative a big pricing changes I would say we tend to look at those over the course of the full year now the pandemic has put some different dynamics at play so we'll continue to.
Really agile in responding to those but if the second half to half of the year emerge as the way that we believe it's going to we will not be facing large pricing movement now what I would say is that when we look at April and May in terms of their utilization and severity those were more.
B, we higher than even what we're seeing in June and July. So those are beginning to taper off so that's increasing our certainty that that second half of the year, it's going to behave on a more normalized pattern and so I don't foresee we're going to have to make large movements.
Hopefully that helps John.
It does thanks for the answers and good luck.
Note alright, thank you so much.
Your next question comes from the line of Tresiba.
Please.
Thank you turning to your strategic update I know, you're not saying a lot about it but is it fair to say that an assay block sales could potentially happen sooner than you all at G. Since on the buyer side Theres.
Our saturation from alternative asset managers.
Yes, I think the best way to think about it as we view these as potentially 1 transaction and there is no shortage of interest in these blocks, whether it's the annuity or the life. As you can expect we're pulling a lot of data together.
And initiating the process, but we.
Our intention is to go into is to maximize shareholder value in whatever structure that is youre, correct and making the assumption that there is sort of a better path or a more well worn out path relative to the annuity blocks from something like USG, but again.
A lot we feel like there are good buyers out there Dan anything you'd like to add to that no. I think if we think about the outreach that we've had since the announcement of the discussions that we've had you know we do think there's a path for execution on both of those.
We're diligently focused on that and we think that we will have further announced.
And so over the next 6 to 12 months on on both transactions on full completion.
Turning to me a follow up.
Yeah. My follow up is I'm wondering why you wouldn't refinance your $300 million 2022 debt maturity, you would still be in the 20% to 25% leverage range and it will be more room.
To get to a capital returned at the higher end of your range.
We are planning to refinance that sorry is your question why we would do that.
Okay, Yes, it wasn't clear to me in your comments I thought you just mentioned you will pay that down.
Felt to me or Humira.
Our refinancing but no we.
Now moving.
We are not finding refinancing and our plan is to pay that off when it comes due in the third quarter of 2022, if you remember back we during the pandemic took the opportunity to issue $600 million of extra deaths due to uncertainty in the marketplace and very very attractive.
Fast forward today, we found that we did not need that par.
For that volatility or any credit pressure from the pandemic and so we felt it was prudent to again take down the debt.
And Murray and retire that $300 million that comes.
I've ran in third quarter of 2022.
Okay. So I should think about that as pre funding and Laura likely you would want to operate at the lower end of that range.
That's correct price that's exactly right.
Okay. Thank you.
Thanks Tracy.
Your next question comes from the line of Sydney commit with Citi.
City. Thanks, Good morning, I wanted to come back to the scale issue in RSV and maybe just ask for your thoughts on something.
Last week empower said on the call that they viewed scale in kind of the DC business.
6 million plan participants, which was up from 2 million 5 years ago, and I guess Mike.
Do it surprised me it was just the rate at which that change with a threefold increase in planned participants to get to scale and I guess I'm wondering if you had any thoughts on that change like that pace of change or if there's something different about your business mix or your target market that maybe would be inconsistent with that commentary.
Everyone's entitled to their own views and opinions on what is the right scale and those people with a lot of scale like principal would argue that having more is better and it helps drive down your unit costs. So I would agree with the overall arching view that more is going to be better and then you have to.
Because you go on the things that really matter, which is what is the quality of the customer service that you are able to deliver what are your what are your capabilities in that gets around to total retirement suite and DB and nonqualified and.
And clearly the importance of of day.
To find contribution 401.
And of course, what is that customer experience. So the scale is 1 key component. It's an important component. We're there and we're going to continue to enhance and deploy technology to help us speed and be more efficient Fernando if you have any additional thoughts on this on this topic.
And Dan you really you've nailed.
The really critical pieces of this I think the thank you remember when we talk about our value proposition and how we compete in the marketplace. We differentiate on several things first stop is total retirement suite and our ability to take our capabilities far beyond defined contribution.
Defined.
Defined contribution there is no doubt that as a highly competitive marketplace and recordkeeping fees are being driven down not only by competition, but also just.
Automation and Digitization of the business, but when we look at our ability to pull together multiple retirement plan.
<unk> types and serve that up to the planned sponsor and their participant in a fully integrated basis using proprietary capabilities and technology. It sets us apart in the same thing is true with the participant in the plan sponsor experience that we deliver again fully integrated across multiple planned types.
And last of all our ability to work closely with our global asset manager.
That truly is expert in retirement and so all of those things create a differentiation that allows us to sex to successfully compete.
Against other competitors.
<unk> might be more.
Solely or primarily focused on the defined contribution market does that helps Nate yeah, no that makes a lot of sense. Thanks for that and then I guess my follow up for Deanna.
On the $110 million of pre tax earnings from the blocks that you plan to divest our assumption is that the.
But the majority of that is from the fixed annuity block.
Block and Theres not much of an earnings contribution from the <unk> block is that a fair characterization and can you give any help in terms of that $1.5 billion of capital that's in those businesses. What the split is between the 2 blocks.
Yes.
I think thats, a fair assumption on the earning.
No I don't think we feel it's prudent to split those numbers into the underlying pieces given the fact that we are planning to market. The divested business as a single transaction and we're already providing incremental disclosure to interested parties, we will take the opportunity when we announced the.
The vast actions to determine whether disclosing more details on the specific blocks that we transact is warranted, but at this point I think your assumption on the earnings split is directional hopefully you can appreciate the rationale behind the discussion.
Understood. Thank you.
Okay. Thank you.
Your next question comes from the line of Josh Shanker with Bank of America.
Okay.
Yes, sorry about that thank you.
I just had a question about calculating this inflation issue in Brazil is that a year over year change or is that a quarter over quarter.
MFC.
A quarter were to end today, how could we sort of translate that into an outcome for the quarter.
Deanna you want to share.
Share some light on that so a couple of things I'll talk about there and again that is a quarter impact and so this is all coming about and if you.
If you go back to the its actually a true up is basically what it is right and so we have to calculate based on this closed block of business that we have not sold since 2001.
Mike.
Okay.
There's a little bit of feedback coming in on the line Mike.
Want to go.
On mute on I'm going to mute, while you're talking.
Thank you.
Yeah, so the the liability and the underlying contract provision linked to the inflation to an index. The GPM due to unavailable any of those assets only about 50% of the assets backing that liabilities, we're able to exactly match to.
To that end to see.
Other remainder we track to a retail inflation index the GPA.
Yes.
Over a long period of time. This has actually been very benign back from 2011 has actually been accumulative benefit.
But it has been a hit over the last 12 months, there's a pause.
And of that in the given quarter that is a lag.
But the majority of that impact is the fact that the there's a mismatch between what we're earning on the assets versus what were credit Dean on the liability we can take it offline with IR and get into some more details of how you could potentially track.
There's a little bit more closely but we do believe that.
But over the long term this will come back into more congruent as between the 2 indexes, but we have a little bit of a mismatch just given the economic.
Financial volatility that's occurring in the Brazilian market, it's also probably worth knowing.
John.
Yes, Gaurav this is.
This is an active conversation with the regulators and the appropriate authorities. They are aware of it theres a lot of domestic players that are obviously impacted including our joint venture partners. So this is getting a lot of airtime and a lot of debate and discussion.
What is an appropriate solution I cut you off go ahead your question.
I'll take the.
Each month to day conversation offline with you guys and figure out what I can do there.
I just wanted to change to Pgi for a second the results were.
Very good in the quarter.
I'm wondering if there is a.
A strategy shift going on where you are.
Are you able to push more money into the higher fee generating strategies.
And is there.
Can we talk about really what led to the really strong result from the quarter.
I.
Want to ever push I think the idea is that we're gonna have very attractive products for our customers and right now the performance in the asset classes lineup well with what customers were asking for it but Pat some additional color, yes, Josh I think it's really that we have an incredibly very vibrant marketplace right now both in terms of.
Market conditions and in terms of.
The flow of capital and some of our flagship capabilities like real estate, which are absolutely higher fee generation capabilities.
<unk> capabilities are in Vogue right now so I think that's 1 area just to highlight our very sort of alpha producing active specialist capability.
I don't think we are really providing that sort of upper first and second quartile performance. We're getting a lot of strong strong support with that and I think our multichannel distribution model our distribution teams led by Tim Hill and conquest.
Platform side in the U S side and on the international side.
I really performing very well right now so.
We've.
He's been doing really well both in terms of the the capabilities that we can offer to the marketplace and getting those capabilities to the broad reach of the retail retirement and the institution marketplace. So it just seems to be coming together quite nicely right now thanks, Pat Josh Thanks for the answers.
Yep.
Our final question will come from the line of Mike <unk> with UBS.
Thanks for fitting me in guys. Good morning, I was just wondering if you could maybe frame the strategic review results, you're recognizing you still have to get through the business exits and derisking that you've identified which is no easy feat I'm sure, but I'm just wondering if we should think.
We've seen view as being largely complete or is it sort of ongoing.
This kind of a first step could there be more incremental derisking, our divestment in the other lines over time.
Yes, I really really appreciate the question, Mike and what I would first day as our board and our Board Finance Committee just did an incredible job.
Job under Clare Richards leadership, and Scott Mills, our lead director.
As I said earlier in my comments it was an incredibly thorough process.
We've put in some additional internal mechanisms to monitor performance and to ensure that the go forward strategy.
Lives up to our investors' expectations.
[noise] about there are expectations and so I don't think it's ever complete I think the reality is youre constantly looking at your portfolio for those businesses in those markets that can drive growth to reward investors and so I'd say phase 1 is certainly.
In play as we speak and.
And now for us to continue to look very closely at these businesses in these markets to make sure that they're meeting our appropriate thresholds and we'll continue to update investors as we go along did you have a follow up.
No that was it thanks very much guys.
I appreciate the question.
We have reached the end of our Q&A Mr. Houston.
I would look for closing comments please.
Yes, Thank you and again, if I were to summarize I think it was a very strong quarter, both measured by financial and customer metrics strong return of capital and advancing our strategy in my closing comments really before and those were the same comments I made when we closed out our <unk>.
Investor Day, which.
Alison you were going to stay focused on our long term growth strategy. We are committed to creating long term shareholder value. We're confident in our ability to execute and we've demonstrated it historically and again this quarter was no exception and we've got 38 million customers around the world to help achieve financial security and Thats job 1 for us. So I appreciate your time today and.
Which was a follow up conversations with all of you. Thank you.
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