Q2 2022 Principal Financial Group Inc Earnings Call
Good morning, and welcome to the principal financial Group second quarter 2022 financial results Conference call.
There will be a question and answers period. After the speakers have completed their prepared remarks.
If you would like to ask a question at that time simply press star and the number one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
We would ask that you'll be respectful of others and limit your questions to one and a follow up so we can get to everyone. In the queue I would now like to turn the conference call over to Humphrey Lee Vice President of Investor Relations. Thank you and good morning, welcome to principal financial group's second quarter 2022 conference call.
That's always materials related to today's call are available on our website at investors <unk> principal dot com.
Following a reading of the safe Harbor provision CEO .
Oh, Dan Houston, and CFO , Deanna Strabo will deliver some prepared remarks.
Then we'll open up the call for questions.
Others available for Q&A include Chris Littlefield retirement, and 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 subsequent 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 Creatives 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.
As a reminder, the transaction to reinsure, our in force U S retail fixed annuity and Universal life insurance with secondary guarantee blocks of business closed in the second quarter.
Transaction had an effective date of January 1st 2022.
Which resulted in a true up in the second quarter to transfer the associated revenue earnings net income and <unk> to the counterparty.
As a result, the second quarter financial results are not comparable to power up periods for RIS spread individual life and total company.
Also related to the transaction was updated or our own E and book value per share of definitions to exclude the cumulative change in the fair value of the funds withheld embedded derivative as a GAAP accounting treatment is non economic.
Additional details on the impact of the transaction.
<unk> in the second quarter earnings call presentation available on our website.
Dan.
Thanks, Humphrey and welcome to everyone on the call. This morning, I will touch on key performance and business highlights for the second quarter, including our view on the impacts of our current macroeconomic environment Deanna will follow with additional details on our results, our financial and capital position, our investment portfolio and our initial L. D T I estimated transition impact.
She will also discuss the impacts of the reinsurance transaction, which was a key milestone for principal as we continue to transform and evolve our portfolio to focus on our growth drivers.
The value of our diversified business strategy was evident in our second quarter results during a period of volatile markets high inflation and macroeconomic uncertainty.
Strong customer growth across our businesses rising interest rates and optimization within our general account are helping us to mitigate some of the headwinds from market volatility.
I have a long track record of managing expenses to weather challenging times and this period is no different we're keenly focused on aligning expenses with revenues to help offset some of the near term pressures on our fee based margins.
Second quarter financial highlights are shown on slide two we reported $423 million of non-GAAP operating earnings of $1 65 per diluted share excluding significant variances earnings per share of $1 70 increased 3% over the second quarter of 2021.
We returned approximately $400 million to shareholders in the second quarter and nearly $1.3 billion year to date through our share repurchases and common stock dividends.
We closed the second quarter with $632 billion of total company AUM.
Reflecting the AUM that was transferred as part of the reinsurance transaction as well as unfavorable equity and fixed income performance and foreign exchange headwinds our long term relative investment performance remained strong while short term relative performance was pressured by market volatility and a continued rotation from quality and growth to value investing.
In the second quarter, we have seen improvement in July .
Total company net cash flow was a positive $1 $5 billion in the quarter.
This included $1.4 billion of Pgi managed net cash flow driven by strong institutional flows across equities and real estate, partially offset by industry wide retail outflows the.
The strong year to date net cash flow in pgi highlights the appeal and value proposition of our diverse and differentiated investment solutions across equities real estate and fixed income.
We continue to develop products and capabilities to meet the needs of our customers. We recently launched an actively managed real estate ETF. The combined two course shrinks with principal active management and real estate investing.
It is focused on non traditional real estate sectors, including Datacenters life Sciences single family rental medical office, and self storage properties and provide retail investors access and a liquid ETF structure.
We're also continuing to build our direct lending team and private credit capabilities. We now have 30 professionals on our team deploying over $1.2 billion in the last two years. Following the funding of our first loan the demand for our differentiated solutions remains robust and will continue to expand our existing capabilities to meet our.
Clients' needs.
A few other business highlights from the quarter, starting in Chile, Despite a level of uncertainty in the future state of Chilean pension system. Our business continues to grow in the second quarter Cooper I'm experienced its fifth consecutive quarter of positive net room, the salary base upon which we earn fees as well as a positive net transfers of new customers, suggesting more.
Fortunately as you're choosing to move their mandatory savings to coupon we remain engaged on the development on pension reform in Chile, and we continue to work with industry peers and stakeholders to promote a more inclusive and well funded pension system to help improve financial security for all Chileans and the U S. The small to mid sized business segments. We target are weathering the current environment.
Well similar to previous periods of uncertainty employers are continuing to seek solutions to help attract and retain talent and are leaning into principal to help in a very competitive labor market. This is especially evident in specialty benefits, where premium and fees increased 11% over the year ago quarter.
Roughly half the growth was driven by net new business. This includes customers moving their benefits to principal selling additional products to existing customers attracting customers that are offering benefits for the first time and maintaining strong retention.
The remaining growth is attributable to employment growth and higher salaries from existing customers.
Our dedication to creating unique tech driven solutions and group benefits is receiving recognition.
The Albar recently rated principle number one for online group benefits administration with its communications seal of excellence for Superior Web experience. This award spotlights, one of our strategic priorities customer experience.
By listening to our customers and responding with systematic improvements to both digital and human interactions, we're consistently improving the customers experience and helping them take the necessary steps towards financial security.
In individual life, our targeted focus on the business market is paying off compared to a year ago sales of nonqualified deferred compensation and business owner solutions increased 76% on a corny basis and 57% on a year to date basis, nearly offsetting the impact of our decision to focus solely on this market.
Through continuous tracking of our brand health metrics, we're seeing steady increases in brand favorability among smbs. This in combination with focused distribution efforts and the market demand for our employer solutions are driving these strong results there.
The resiliency of the SMB market also comes through our U S retirement business in RIS fee second quarter reoccurring deposits increased 37% in total and 14% on our legacy block as compared to a year ago.
We're seeing growth across our participant base stemming from both net new business and employment growth on our existing block.
Existing participants we're also saving more this along with strong sales retention drove $2.5 billion of positive account value net cash flow in the quarter.
<unk> also recently recognized principal as one of the top five retirement plan providers with superior mobile enrollment experiences. This acknowledges our seamless rollover process, making it easy for participants to move their retirement savings to principal and opting into their new retirement plan.
Overall, we're entering the second half of 2022 with momentum prepared to navigate uncertainty in the macro environment. Our transform portfolio focused on our growth drivers will continue to drive financial and customer results Diana.
Dan Good morning to everyone on the call.
This morning, I'll share the key contributors to our financial performance for the quarter, including impacts of the reinsurance transaction and update on our current financial and capital position details of our investment portfolio and our initial estimate of the L. D T I transition date impact.
And Humphrey mentioned the reinsurance transaction closed at the end of May and was a key milestone that reinforces our strategic focus on evolving into a higher growth higher return more capital efficient enterprise, while also reducing our risk profile.
It closed the economics of the reinsured blocks of business transfer to the counterparty with a January 1st effective date. This resulted in a true up of the related revenue non-GAAP operating earnings net income and a O M from first quarter in our second quarter reported results.
Net income attributable to principal was $3.1 billion in the second quarter, reflecting $2 $8 billion of income from accident businesses.
This benefit was primarily due to a change in the fair value of the funds withheld embedded derivative, which doesn't impact our capital our free cash flow and can be extremely volatile quarter to quarter. Excluding this $2 $8 billion of income from exited businesses as well as a negative $83 million true up for the first quarter game.
And our funds withheld portfolio net income for the quarter was $315 million.
Excluding true ups related to the reinsurance transactions and other significant variances second quarter non-GAAP operating earnings were $435 million.
Operating EPS of $1 70 per diluted share increased 3% compared to the second quarter of 2021.
The second quarter non-GAAP operating earnings effective tax rate was nearly 20% on a reported basis and 18% excluding significant variances for the full year, we continue to expect to be within the 17% to 20% guided range.
As detailed on slide 14, we had several significant variances that had a net negative impact on non-GAAP operating earnings during the second quarter.
On a pretax basis benefit from net favorable variable investment income and inflation in Latin America were more than offset by the reinsurance transaction true up COVID-19 related claims and higher DAC amortization. These.
He's had a net negative impact to reported non-GAAP operating earnings of $3 million pre tax $12 million after tax and five cents per diluted share.
Specific to variable investment income RIS fee RIS spread principal international specialty benefits and individual life benefited by a combined $56 million pretax primarily due to higher than expected real estate sales and alternative investment returns. This was partially offset by a negative $41 million impacting corporate.
As the increase in interest rates and decline in equity investments negatively impacted some mark to market investments.
With approximately 35000 U S COVID-19 related deaths in the quarter, we had a negative $10 million pretax impact primarily driven by disability claims in specialty benefits and life claims in individual life. The first quarter reinsurance transaction true up negatively impacted second quarter pre tax operating earnings by 13 million.
In dollars this excludes stranded costs as they remain in our reported results and were not part of the true up did.
Details of the line item impacts of the true ups for RIS spread and individual life are available in the appendix.
Macroeconomic volatility continued in the second quarter and pressured earnings in our fee based businesses.
Unfavorable equity market in fixed income performance relative to both the prior quarter and year ago quarter negatively impacted AUM account values fee revenue and margin and I S. V. M. P. G I as well as DAC amortization in RIS fee.
However, the higher interest rate environment does benefit our businesses over the long term with our new money yield exceeding 5% in the second quarter.
Foreign exchange rates were a headwind in the second quarter impacts to reported pre tax operating earnings included a negative $1 million compared to the first quarter of 2022 and negative $5 million compared to the second quarter of 2021 and a negative $7 million on a trailing 12 month basis.
And Kai performance in total didn't impact second quarter results as $8 million of higher than expected performance in Chile was completely offset by lower than expected performance in Mexico.
We're taking actions across the enterprise unexpected due to pressured fee revenue as we have done in previous periods of macro uncertainty and volatility we are committed to aligning expenses with revenues, while continuing to invest for growth, but there is a natural lag as we put actions in place.
Turning to the business units the following comments on second quarter results exclude significant variances.
R. S V pre tax operating earnings and margin decline from the year ago quarter, primarily due to unfavorable equity and fixed income markets pressuring revenue second quarter was also impacted by the final TSA expenses related to the IRT transaction.
And our S spread net revenue was flat despite the reinsurance transaction as growth in the business and higher net investment income, including the benefits from portfolio optimization more than offset the loss of the fixed annuity revenue pre tax operating earnings increase despite flat net revenue as operating expenses were lower reflecting impacts of.
The reinsurance transaction.
Despite macro pressures P. G. I reported strong second quarter results with $1 $4 billion of positive net cash flow and the overall management fee rate of approximately 29 basis points remains stable.
Pretax operating earnings and margin benefited from a net $30 million of performance fees earned in the corner.
Excluding the benefit from performance fees Pgi second quarter margin was strong at 39%.
In principal international pre tax operating earnings were flat with a year ago Carter as growth in the business was offset by the regulatory fee rate action in Mexico, and foreign exchange headwinds.
On a constant currency basis pre tax operating earnings increased 5% over the year ago quarter as.
As Dan highlighted specially benefits continues to deliver strong results and increased pre tax operating earnings 35% over the year ago quarter. This was fueled by growth in the business, including an 11% increase in premium and fees as well as improve life and disability claims and disciplined expense management, we expect the <unk>.
Strong growth in premium and fees to persist throughout the remainder of the year.
Corporate losses were elevated in the second quarter, primarily due to the timing of certain expenses related to strategic initiatives. We continue to expect to be within the $370 million to $400 million guided range on a full year basis, excluding significant variances, implying lower losses in the second half of the year.
Turning to capital and liquidity, we remain in a strong financial position and are focused on returning excess capital to shareholders.
We ended the quarter with $2 billion of total company available cash and liquid assets. We also have $800 million of untapped revolving credit facilities available for liquidity purposes.
Excess and available capital is currently estimated to be $1.9 billion and includes $1.3 billion at the holding company higher than our $800 million to cover 12 months of obligations approximately $370 million in our subsidiaries.
And $200 million in excess of our targeted 400% risk based capital ratio estimated to be 415%. We also have access to a $750 million contingent capital facility.
We will continue to maintain a 20% to 25% leverage ratio and expect the ratio to continue to improve as we pay down $300 million of long term debt set to mature in the third quarter.
Despite the pressures of the environment, we remain in a strong financial position, we have the financial flexibility disciplined and experience necessary to manage through this time of macro volatility and uncertainty.
As shown on slide three we returned nearly $1 $3 billion of capital to shareholders in the first half of the year. This includes approximately $400 million in the second quarter with $162 million of common stock dividends and $240 million through share repurchases.
$140 million of the share repurchases. This quarter was the balance of the 700 million dollar accelerated share repurchase program that we initiated in the first quarter last night, we announced a 64 common stock dividend payable in the third quarter, a 2% increase from the dividend paid in the third quarter of 'twenty 'twenty. One this is in line with our target.
Mid 40% dividend payout ratio and reflects strong business performance. It's important to note that our full year capital return guidance assume markets as of the end of 2021 and the targeted $2.5 billion to $3 billion of capital returned to shareholders included three sources of capital excess capital at the holding company 800 million.
A deployable proceeds from the transactions and free capital flow generation from our businesses.
We remain confident in our 75% to 85% free capital saw conversion, but the dollars of capital generated is dependent on the overall market environment and the resulting impact on our fee based businesses.
We remain focused on maintaining our capital and liquidity targets at both the life company and the holding company and we'll continue with a rigorous and disciplined approach to capital deployment in the current environment.
Turning to slide four after the close of the reinsurance transaction, our investment portfolio remains high quality diversified and well positioned our total invested assets decreased $23 billion as a result of the reinsurance transaction during the second quarter as we worked with the reinsurance counterparty between sign and close.
<unk> to identify the specific assets included in the funds withheld account, we had the opportunity to retain certain differentiated higher yielding commercial mortgage loans and private credit assets.
These assets fit well with the lower liquidity needs of our go forward liabilities and increase the portfolio yield by approximately 20 basis points as a result, the impact of the transaction on the company is reduced with RIS spread benefiting the most the higher yield is driving higher net investment income in RIS spread than we assumed in our guidance.
Benefiting that revenue and margin.
Excluding significant variances, we now expect the margin to be at the high end of our guidance range and a 5% to 10% decrease in RIS spread full year 2022 net revenue from 2021 due to the transaction improved from our outlook of a 20% to 25% decline.
We're comfortable with the rest return profile of the remaining general account.
The portfolio is high quality and a good fit for our liability profile.
Q other comments on our investment portfolio. The commercial mortgage loan portfolio has an average loan to value of 45% and an average debt service coverage ratio of two and a half times, we have a diverse and manageable exposure to other alternatives in high risk sectors and importantly, our liabilities are long term and we have a disciplined asset liability management additional.
Details of our investment portfolio are available in the appendix of the slides.
As many of you know the targeted improvements for long duration insurance contracts accounting guidance R. L. D. T. I goes into effect on January one 'twenty 'twenty three.
Importantly, L D T I doesn't change our underlying economics free cash flow generation or our capital position.
But it will have an impact on our reported financial results. We are adopting the guidance on a modified retrospective basis, and we'll recast 2021 and 2022 financial results under L. D. T. I in early 'twenty 'twenty three we're currently estimating that the transition impact from the adoption of L. D. T. I will decrease total.
<unk> equity between approximately 4.8 and $5.8 billion as of January one 2021 nearer.
Nearly all of this impact will be in a OCI and is driven by the requirement to update the discount rate assumption on impacted liabilities to the equivalent of a single a interest rate with credit ratings based on international rating standards.
As a result L. E. T. I is expected to have an immaterial impact to our equity and book value excluding a OCI.
Sitting here today, we expect the impact of stockholders' equity from L. D Ti to be immaterial as of the second quarter of 2022 as interest rates have risen significantly from where they were at the beginning of 2021.
Our transformation into a higher growth higher return more capital efficient company focused on our growth drivers is paying off as of the second quarter and excluding significant variances non-GAAP EPS increased 3% over the year ago quarter, despite impact from the transactions and macro volatility and ROE.
Move to 14.2%.
As we move forward executing on our go forward strategy and strengthened capital management approach, we will continue to invest in our growth drivers of retirement in the U S and select emerging markets global asset management and U S benefits and protection all with the aim to drive long term shareholder value.
This concludes our prepared remarks, operator, please open the call for questions.
And at this time I would like to remind everyone that asked a question you May Press Star then the number one ranking telephone keypad will calls, we'll just we'll pause for just a moment to compile the Q&A roster.
Yeah.
Yeah.
And our first question comes from the line of Ryan Krueger with K B W.
With your question.
Hi, Thanks, good morning.
I was hoping to dig into the investment repositioning a little bit I was trying to do some back of the envelope math.
But all the faster you can make it a little bit easier.
Can you just help us think about relative to the original guidance you had given for the impact of the reinsurance transaction, how much more or how much less of a negative impact you would expect now due to the repositioning actions that you took.
Yes, good morning, Ryan good to hear your voice Deanna you want to help shape that yeah, I think I'm, probably the best way to shape that is to look at a 20 basis point impact on a pre tax basis on the 70 billion dollar portfolio.
And that would be kind of the delta between what we originally assumed in what we received now I'm on the prepared remarks, we did talk about the impact of spreads outlook, which is where most of that benefit will be now we expect net revenue to only be down 5% to 10% a much improved from the 22.
The 5% that we talked about earlier and that would equate and spread to about $20 million pre tax per quarter of additional earnings.
I hope Brian .
Yeah, No that's great. Thanks, and then just a follow up on your comment.
Capital return I think you said that the guidance is based on year end 2021 market are you able to frame the.
How youre thinking about things now with markets, where they are today.
Yeah. Thanks for the question Ryan Obviously is as you just reiterated our outlook range of two to $2.5 billion to $3 billion.
Which included two to $2 3 billion of share buybacks was based on markets is as of the end of last year and if we look at our implied daily average sitting here today, that's about 15% lower than what we would have anticipated coming into the year and we've also seen additional fee pressure from fixed income value.
I do think as I sit here today and look at year to date financial results I think it's a really good testament of our diversified business model, where strengths in other businesses has the revenue pressure that we've seen in pgi and RIS fee. So I do see a path to those outlet numbers I still feel really good about the 70.
5% to 85% of free cash flow.
Obviously the transaction proceeds are coming in as expected, but there is obviously still some uncertainty in where we end within the 75% to 85% and where and what that produces as far as dollar amount of free cash flow is still going to be pretty dependent on the markets and how that market plays into our fee businesses.
Because obviously those sit at higher percent free cash flow I'm flowing into that overall company number and so again like I said I do think we're going to be disciplined in the current environment, but we're also positioned for a much higher dollar amount of capital return this year and just as a reminder, we'll also be using some of that capital to pay down debt.
In the third quarter, that's $300 million and obviously, the China pension acquisition.
Could come into play this year as well so a strong year of capital deployment, but some market uncertainty could play into the absolute dollar amount for the <unk>.
Brian .
Thanks, a lot.
Our next question comes from the line of Tom Gallagher with Evercore ISI. Please proceed with your question.
Hey, Good morning first question just on Pgi earnings I chose those are quite strong, particularly when compared to other asset managers.
The 150 million would you say that's a good run rate heading into Q3, and Q4 and I realize there's an average daily.
Level to consider two two versus three Q, but I think we've.
We covered most of that.
But I guess my my real question is is there anything unusual in this quarters earnings on the revenue side like transactional revenues that may not be recurring or do you feel like the 150 as it is a decent baseline of earnings here.
Yeah, I'll have Pat address that again I would just say Tom appreciate the question. We did have a really strong results coming out of Pgi and theres a little bit of.
Explanation with regards to some of the fees, but I'll.
Give you those details Tom.
Todd Thanks for the question Ed maybe the only thing I'd highlight is in the second quarter. We did have some performance fees that were noted and I think you are aware of those that was predominantly driven by real estate transactions and as you know the timing of those real estate transactions is quite variable and it depends on market conditions client demand when they want to sell our <unk>.
Before management views of when the right time to sell and so we did have some elevated performance fees in the second quarter that probably are front end loaded a little bit for the year relative to the full year outlook to take advantage of some of the market conditions that we saw in the real estate center.
That being said we continue to have a good pipeline of our of real estate transactions that I think will you'll be able to harvest performance. These longer term, but probably as we look forward into the second half of the year time.
Performance fees would probably be a little more slightly muted.
As market conditions warrant.
But continue to have very strong I think our expectations for the management fee outlook.
And Pat just a quick follow up on that is the 39% pre tax margin you think a decent and I think that's an ex performance fee margin do you think that's it that's a reasonable expectation for near term results there.
Yeah, I think it is I think it is Tom.
We clearly.
Continue to see pressures and in the AR and the management fees, particularly given the negative equity markets and fixed income results that we saw in the first half of the year, which will put some pressure on I think margins are.
But that being said.
We are very focused on preserving margins and.
Within a target range that we put into our outlook for the year, which was 39 to 42 and we expect to be in that range likely probably at the lower end of that range, but definitely are going to expire and our management team is focused on keeping those margins in that range.
I would add is a lot of patch expenses are variable expenses and we are across the entire organization aligning.
Expenses with our estimated revenues and so a very conscientious effort to preserve as much margin as we possibly can.
Okay. Thanks.
Thank you.
Our next question comes from the line of Jimmy Buhler with Jpmorgan. Please proceed with your question.
Hi, Good morning, So first a question for Pat just on the investment performance at Pgi and it seems like it's gotten progressively worse. If you look at our three year, one year versus the five year and longer periods and wondering if you think this is because of.
Any stylistic differences or anything more company specific and what's the impact of this both on P. G. I agree you've shown very strong flows recently, but then also some of your other businesses that rely on pgi.
Please go ahead.
Thanks for the question Jami so.
On the one year numbers, we have had some I think.
Performance.
That is in more than a third and fourth acquired predominant due to our style of investing on the equity side, it's predominantly a quality growth philosophy and her investment approach, whereas value in cyclical sort of style investing has performed much better now that being said, though Jamie we really haven't seen a correlation.
Between one year performance and net cash flow, which is really the important I think variable to look at as we see and as you look at our three five and 10 year performance numbers. Those are probably more I think insightful in terms of what that translates into investment.
Net cash flow going forward and we continue to see very strong I think results in that longer term a sort of a horizon.
We still have a really strong base of strategies that are competitive in the eyes of investors and desired by investors in the marketplace and we saw that in the second quarter with some of our equity capabilities are very desired in the marketplace. Yet we saw that in some of our high high sort of income oriented capabilities.
And we actually think that's continuing to credit and let them for us in the third quarter, Jamie we continue to see very strong desires for some of the things that we offer real estate absolutely continues to be desired. We continue to see desirability for some of our specialty income products and that's actually starting to accelerate and the high yield sector and prefer.
<unk> and emerging market debt and we continue to see some of our equity capabilities continues to be desired in the marketplace. So our sort of solutions are sort of broad based capabilities. I think are still relevant in the eyes of investors and still feel good about the performance delivering that cash flow that will be positive as we look forward.
Okay, and then on theater document the flows I'm, assuming are obviously benefiting from the strong labor market and competition for talent, but are you seeing any impact from inflation and is that affecting the draw rates at all or are you seeing any hardship withdrawals or anything else of that nature because of the.
Consumers being stretched.
Okay. Good question, Jamie and as we all know, it's a tight labor market to retain and attract talent you have to have good benefits and I'm.
I'm like you awestruck, just how strong the results are.
And maybe I'll just have Chris provide some insights and perspective on the strength of the RIS fee business.
Yeah, Thanks, Dan and thanks, Jamie.
Again, I think Youre right, we are definitely benefiting from the labor markets and the competition for talent both.
Hello, employment higher comp competition, and we're also seeing very strong customer retention.
We're seeing mid teen growth in our deferrals of employee matches above what we would normally expect in fact, we break that down we're seeing growth in the number of our participants is up our implant purchase can growth. Those that are deferring is up our average deferrals per members are up the number of participants receiving an employer matches increase.
By 10% ex IRT. So we're just seeing really really strong performance from both employee deferrals, our employer match increases and the benefits from from the labor markets on <unk>.
Draw, we definitely are seeing a bit more a little bit elevated but its slight largely due to the job change that we're seeing in the churn a little bit in the employment markets. So that's driving a small a slight increase in participant withdrawals as a percent of average JV, but its modest Jimmy I appreciate it.
Questions.
Sure.
Our next question comes from the line of Alex Scott with Goldman Sachs. Please proceed with your question.
First one I had is just around the completion of the transaction you know I know the.
The actual I guess you are fixed annuity transactions were completed but are you done with the I guess in totality like what you announced at the time, you announced that transaction I think some of it has to do with reserve financings and that sort of thing. So you know is there anything left to do there that we should consider as we look at your capital position.
Yeah, Alex I. Appreciate the question you know and we've we've talked about this previously and just.
Maybe bring it full circle the effort that went into the strategic review was really exhaustive work with the board of directors and outside outside.
Outside advisers, and we really did feel when we presented a year ago June our go forward strategy that we had interrogated every business every market every location for its ability to contribute to the long term success as we've framed it for you and all the other investors I would say any other modifications.
From here on the margin around products around market specifically.
But the heavy lifting is for the most part.
Bleed and feel really really good about the go forward strategy Danna any further comments yeah. I think your question was really specific to the $800 million of deployable proceeds and the timing of that.
Sitting here today that we have received the majority of that some came in first quarter. Most of it came up until in second quarter up to today and in a small amount is yet to come probably later this year or maybe a little bit early next year.
And that's either sitting in holdco or sitting in a life company. So almost all of that is already in hand.
You get the benefit of already of having two questions. Andrew with one question. So you still could have a follow up there Alex.
Thank you.
I guess the second question in RIS fee, when I think about the strategy to improve margins. There as you sort of bring wells Fargo completely on TSA fees gone now.
Mark it's a little more volatile, though what what does that look like in terms of where margins go from here.
Right.
Yeah. Thank you yeah, I mean, I think as you as you noted the fee the fee businesses are certainly I'm seeing a little bit of margin pressure.
But as Dan at the Ena pointed out in her comments, we also have a spread based retirement business and we we do look at managing those in total and so when you get the offset it's helpful. As we think about the fee margin going forward. The macro headwinds are providing the greatest pressure to the mark to the margin performance.
And you know obviously as Deanna mentioned in her comments Theres, a theres a natural lag to adjusting to the speed at which the market's moves on both equities and fixed income in the second quarter. So we're going to be looking at really pulling revenue and expense levers to narrow the gap to the margin guidance. We've proven digitally provided and obviously some of that will be dependent upon market performance.
Certainly have seen a better market performance to start the third quarter. So the combination of us remaining disciplined on expenses looking for additional revenue opportunities as well as market should help us close that narrowed that gap to the margin guidance. We originally provided Alex It's also private worth noting that and we've talked about this historically in that.
Some of the value creation from the.
<unk> platform as captured within asset management, where we're able to get mandates for existing customers in the IRT customers Trs benefits are captured and oftentimes within our and cure the or the life area and of course, the participants rollover opportunities will show up in our and our mutual.
Fund complex. So again I think we have to be.
Thinking a very comprehensive way when we think about the value of the retirement plan platform and where some of these benefits are occurring within the overall organization hopefully that helps.
Yep got it thank you.
Thank you.
Okay.
Our next question comes from the line of Erik Bass with Autonomous Research. Please proceed with your question.
Hi, Thank you actually I wanted to follow up on the RIS fee discussion.
Hoping you could talk a little bit more about the drivers of the year over year decline in normalized earnings.
We're down a bit more than the market in the U M. Over the same period. So I guess was there anything unusual in expenses here or is that kind of $111 million adjusted number a good baseline to think about going forward.
Chris Please yeah sure Eric.
Certainly the macro pressures are the biggest driver of that there are there is some offset and some additional expense pressure happening from some post migration work on IRT in the trust and custody businesses as you'll remember we just brought over the trust and custody business at the end of February . So we are seeing some elevated.
<unk> expenses through the balance of this year as we are as we bring that business and get that get that business in a normal state, but again you know we're going to be really disciplined in working to narrow that gap to the guidance we provided.
Got it. Thank you and then maybe a follow up on just thinking about capital return beyond the second half of 2022 and I think your plan contemplates drawing down a lot of the excess capital. So should we think of kind of for 2023.
It really being tied to your free cash flow and sort of.
Total payout ratio for dividends plus buybacks being in that 75% to 85% of earnings range.
Yeah, Yeah, I think that's the right way to think about it Eric.
Having said that our 2023 reported results will be adjusted due to a L. D. T. I. So we'll have to understand kind of how that plays through but yeah that that really will be the primary driver of our capital deployment as we think beyond 2022.
Got it thank you.
Thanks, Eric.
Yeah.
Our next question comes from the line of Tracy Bing Bing jewelry with Barclays. Please proceed with your question.
Thank you could you walk through the moving parts that drove RPC changes in the second quarter, where you're at 415% and in the first quarter you're at 400%. TWX. Then was this due to the amount of excess capital you're drawing down or did the reinsurance transaction all have an impact.
And if I could tag on here, if you're anticipating that your asset allocation changes could impact our required capital in any way.
Our questions. Thanks, Dana Yeah, there's a couple of moving parts. There obviously any of the capital changes of the portfolio would have been reflected in that RBC ratio as of the end of second quarter. Most of the proceeds of the transactions do flow through the life company and so we did do a dividend to holding a tough.
Holdco during the quarter, but it did not entirely offset the proceeds from.
From the quarter and ultimately we will plan to leave that back down closer to the 400% target them as we go through the rest of the year. So it's it's really driven by the transaction proceeds I'm, obviously normal gain from operations, but any capital required capital needed from the change in the portfolio as reflected in that.
Number.
Okay got it and Directionally.
Was it how did that impact.
It did have sort of.
It did it did require some additional capital just given the nature of those portfolio, but very manageable within our our capital levels.
Got it and this doesn't affect you guys anymore, because but just because you all S. G has come up as a theme this quarter I'm just curious back when you were contemplating various strategic updates and you identified that you all F. G block transaction what was it about the block that got your attention with the changes in policyholder.
Here like a dynamic lapse function or something else I'm, just trying to get an industry perspective here.
I think from my perspective, it had way more to do with the strategic direction of the company that we really didn't feel that we add.
A product that we would be competitive in in retail life insurance business at the same time, we had had a strong track record in the business owner executive solutions and around nonqualified deferred comp because again it supports our strategy of targeting small to medium sized businesses and this is what they're looking for.
From from US so all the other variables around what are the long term interest rates whats policyholder behavior. All of those things were interesting to us but at the end of the day. It was a divestiture of a block of business that we just didn't feel that we had differentiated capabilities to go to the market and so maybe I'll ask Amy if she has any additional cost.
And she wants to own the place there as we contemplated that book of business, Amy Yeah, Dan I think you've done a nice job answering that question I think one of the things.
That lost a little bit of focus through this strategic review is we actually prior to initiating the strategic review had announced that we were going to discontinue new U L. S. T cells and so this is something that really was even without the extra strategic review work with something that wasn't sitting in our portfolio as well.
In terms of the future moves we needed to have the product solutions, we needed to have them.
Available to those areas that we wanted to grow so it was as Dan said more of a strategic fit issue for us.
Really appreciate the questions Tracy.
Yep.
Our next question.
Oh, John Barnidge with Piper Sandler. Please proceed with your question.
Good morning, Thank you I.
I know people are worried about inflation job cuts, but groups sales is rather strong across products really can you maybe talk about what youre seeing in your core SMB market and maybe how that trended as the quarter progressed.
Yeah, It really appreciate that and what a great quarter and first half of the year for Amy and her team in the group benefits Amy do you want to provide some some insights I think maybe John just to tag onto that a little bit around what we're also seeing in the retirement space in terms of strength in.
In that SMB segment too because as you know we have a disproportionate percentage of our business in that in that market space. Amy Yeah. So John you've already noted a great sales also you know just not across the industry in terms of group benefits that clearly all of US who have a group benefits business had been benefiting from kind of.
That strong competition for labor, where I would say principles, probably uniquely been benefiting is that with that small to medium size business focus we are seeing a sentiment emerge and again, you're aware that principal does some primary research on this so we're starting to see some sentiment emerge that says even if we are headed into a point where we.
Have inflation of recessionary concerns I would say those small business owners and mid sized businesses have fought so hard for that talent, what they're saying is the first action I am not going to take us I'm not going to impact wages and I'm not going to impact employment. So we're seeing very nice persistency in wages and employment. We're also still continuing.
To see some growth so our indexing in that small to mid size business market combined with the sentiment. We're seeing is really putting together some nice growth now and we continue to see that through the future as Deanna indicated in her comments.
Chris any comments you want to add relative to your SMB block and what Youre seeing in terms of shrink.
We're seeing strength across all segments, but with respect to small medium large and mega we're seeing really nice momentum.
In the SMB market in particular, we saw really nice cash flow, we saw participant avs up at about 5% year over year, our total contracts a total planned numbers in the SMB space are up and our recurring deposits in the SMB space alone are up about 14% and we have concentrations in our retirement business I think similar to Amy's.
In the professional scientific and technical services segment, which is a very large portion of our retirement block, which is projected to have the second highest growth behind health care over the next you know.
Seven seven years or so so we feel really good about our position on the retirement side in the SMB space as well John do you have a follow up.
Yes.
Thanks, Dan.
You had talked about within Pgi, there had been some.
Performance fees from real estate gains.
This gain harvesting get accelerated in the first half of the year and is there a knock on that we should be thinking about variable investment income in the second half from that or could you offer maybe walk.
Walk into the third quarter since that's a one quarter asset.
Thank you very much.
Yeah, I'll defer to Pat, but I would just simply say this we think of this as being a decision of lives within our investment professionals on the on the timing of divestitures.
And when we take full advantage of that because ultimately we're trying to deliver value to our investors and without regards to the overall corporation's needs, but at any further insights on the real estate profit harvesting yeah. Thanks. Thanks John .
It really is much more aligned with where the properties are at the stage of development or stage of just acceptability in terms of sort of harvesting of gains off those properties, it's really a a market condition evaluation Jon.
Where are the real estate values are.
Well, we're actually sort of looking forward and seeing what our clients desires are what our portfolio managers feel is the right time to harvest those gains and so it's not.
At all a a financial sort of arbitrage is discussion is really to optimize the performance of that asset and so the timing is variable and it will be dependent on market conditions and the decision making of our portfolio managers.
Thanks, Sean Thank you.
Yeah.
Our next question comes from the line.
Our math with Jefferies. Please proceed with your question.
Hi, Thanks, I just wanted to follow up on one of John's questions that I don't think you answered.
Any just insights into what we should expect for VII here in the third quarter.
Yeah.
Yeah, I'll make a few comments and see if that has anything to add so.
You're aware and it really got flowed into the last question more of a V. I I then than probably some of our peers is driven by real estate I'm, obviously, prepays and other all flow into that as well I also think it's worth noting that our alts for fault folio is less skewed to private equity than our peers, which does reduce the volatility of RV.
I I am sitting here today, just given the lag we could see negative VII in the second half of the year lower than our expectation, but I also think it's really critical to understand that the makeup of our portfolio does reduce the volatility.
Both on the upside and the downside relative to our expected levels, but Pat do you have anything more to add there no I just think the second half of 2022, you know, obviously, a macro headwinds and as we talk to the managers, particularly in the private equity side.
Our market outlook and the lagging nature of the of the return cycle.
See some pullback clearly in our out performance and it'd probably be below trend what we've been seen in the past.
Got it and then I guess.
It was it maybe if I could just have one quick clarification on it when you said negative do you mean like negative relative to expectations or an absolute negative return.
Negative relative to expectations.
And then just my follow up is on.
The assumption review I know, it's less of an issue for you guys now, but anything that you're paying particular attention to as you go through that process and just wanted to confirm that within the retained life block that you have that Theres no S. T U L sitting in there.
Yes. Good question, Dan a couple of things. There you obviously are we're coming up on our third quarter reviews. Since we're sitting here today I'm you know I do think it's important to understand that it's part of the strategic review and as we worked with third party consultants. We did take a look at all of our actuarial assumption.
So I think that will play into the the magnitude of the changes that we'll contemplate as we go through this review them. We obviously will be updating for current starting interest rates. So that obviously, if it stays where it is today, we will have a positive impact on our actuarial balances and then specifically to the U L. S. G. No we have no remaining secondary guarantee.
Business within our block and any impact from an assumption change on the reinsurance block would be entirely offset by a reinsurance credit and so again that that obviously does really reduce the risk in our block of business as we go into the third quarter review.
Okay. Thank you.
Our next question comes from the line of Andrew Cleveland made with Credit Suisse. Please proceed with your question.
Hi, good morning.
Just clarifying Deanna based around your comments I would assume then that.
And excess capital standpoint, do you want to get to the 800 million that you had speck.
Specified.
At your Investor day, so try the excess down to $800 million.
Yeah, Andrew that is our enhance you know obviously around the edges, whether it gets exactly to 800 million are you know a range around that obviously things happen at the end of the quarter that you don't always.
Them understand but but that's our desire them, obviously, if anything I'm greatly increases the risk from a credit perspective will be prudent and disciplined relative to that but sitting here today, that's our desire.
Makes sense and along the way from an M&A standpoint are you seeing any.
The acquisitions that you might be interested in and if so could you give a little a little color on that.
Right now we feel strong Andrew that our organic investment is where we want to put our focus in all of our businesses. We certainly have.
Sort of an active pipeline of seeing and putting eyes on.
Asset prices and all the businesses and what should we do business, but at this point in time, we do not anticipate deploying capital beyond Emerald, which is of course the investment in I'm, sorry in China with regards to our.
Enterprise annuity buildout.
Got it thank you.
Thank you.
Our next question comes from the line of Josh Shanker with Bank of America. Please proceed with your question.
Yes. Thank you very much for getting me in the end.
So I'm hearing mixed things you obviously.
Interesting commentary about the L. D G I impact prior to this quarter and now there's very limited impact in this quarter. There's some volatility in there, but would you be willing to spend any money on hedging merely to manage the volatility.
And L D T I or does that seem like not a useful use of your capital.
I think it would be inefficient to do so, but I'll defer to my very capable CFO to respond yes, I think you'd come back to that LD NCI does not impact the underlying economics free cash flow generation, our capital position, we feel good about our hedging positions that we have across our portfolio and don't feel that L. D. G I.
Hi will impact that I also come back to that a majority of that does sit in Aoc I that volatility and again still feel that looking at equity and book value ex Aoc I is the appropriate metric one given the fact of the volatility there and not all assets and liabilities are running through.
With L D T I or mark to market. So.
We wouldn't contemplate any changes sitting here today.
That's all I need thank you very much.
Appreciate it Josh.
Yeah.
And our next question comes from the line of Mike Ward with Citi. Please proceed with your question.
Thanks, guys just a quick one.
Any update or further detail you might be able to provide on the China construction bank deal or potential use of capital.
Yeah. So again very much on track, having sought and received the regulatory approval. There is some final steps that we're taking with PCB itself, but definitely see this coming to close before the end of the year and feel very good about leveraging that existing relationship with China construction bank.
Alright, thanks very much.
Thank you I appreciate it.
And we have reached the end of our Q&A Mr. Houston Your closing comments please.
Thank you operator appreciate that I just want to highlight a couple of recent additions to the principal leadership team Teresa Sarah will work with Chris Littlefield to lead our workplace savings and retirement business. Teresa has spent the last 25 years, helping shape. The workplace retirement solutions that will be just a tremendous add here at principal we also want to wealth.
Natalie Lamarck, who has joined US as our new General Counsel Nathalie has had extensive experience and unique experience within the industry that will provide a welcome perspective to the company shall also received compliance and our government relations operations, which wonderful to have both Theresa and Natalie joined the organization I look forward to and I know the other exactly.
Look forward to visiting with investors here over the next couple of weeks to answer any unanswered questions. Thank you for your time today.
And thanks for participating in today's conference. This call will be available for replay beginning at approximately 12 P. M. Eastern time until end of day August 12, 2022, 13731251 is the access code for the replay the number to dolphin.
Replay 8776606853 of that is for the U S and Canada, Oregon dial to 0161 to 7415 for international callers.
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