Q3 2022 Principal Financial Group Inc Earnings Call
Good morning, and welcome to the principal financial group's third quarter 2022 financial results Conference call. There will be a question and answer period. After the speakers have completed their prepared remarks.
If you'd like to ask a question at that time simply press star and the number one on your telephone keypad.
Information tone will indicate your line is in the question queue. We would ask you please be respectful of others and limit your questions to one and one follow up so that we can get to everyone. In the queue I would now like to turn the conference over to Humphrey Lee Vice President Investor Relations. Please go ahead, Sir Thank you and good morning welcome to principal.
Financial groups third quarter 2022 conference call.
As always materials related to today's call are available on our website at investors stopped principal dotcom.
Following a reading of our safe Harbor provision.
Oh, Dan Houston, and CFO Deanna Strabo will deliver prepared remarks, then we will open the call for questions.
Others available for Q&A include Chris Littlefield.
Retirement and income solutions.
<unk> 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 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 come.
With the U S Securities and Exchange Commission.
Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures reconciliations of the non-GAAP financial measures to the most directly comparable U S. GAAP financial measures maybe found in our earnings release financial supplement and slide presentation.
Dan.
Thanks, Humphrey and welcome to everyone on the call. This morning, I will touch on key performance and business highlights for the third quarter.
Deanna will follow with additional details on our financial results, including our annual assumption review and an update on our financial and capital position, our third quarter results demonstrate the strength resilience and value of our diversified business strategy. We remain focused on aligning expenses with revenues to help offset some of the near term pressure.
Sure on our fee based margins from unfavorable equity and fixed income market performance at the same time, we continue investing for growth to fulfill customer needs and expand our capabilities to support our growth drivers starting on slide two we reported $427 million of non-GAAP operating earnings were $1 69 per day.
Looted share in the third quarter, excluding significant variances earnings per share of $1 60 decreased 2% from the third quarter of 2021, we returned more than $600 million of capital to shareholders in the quarter and $1 $9 billion year to date through share repurchases and common stock dividends.
<unk> also paid down $300 million of debt that matured during the quarter a commitment we made coming out of our strategic review to lower our leverage ratio and maintain a strong financial profile. We closed the third quarter with $608 billion of total company AUM pressured by unfavorable equity and fixed income performance as well as foreign.
Exchange headwinds in the quarter.
Our long term relative investment performance remained strong and our short term relative performance improved over the second quarter. Despite continued market volatility.
This performance was further enhanced by the strong absolute returns and other alpha producing funds, which are not included in the Morningstar ratings third quarter total company net cash flow was a positive $2 $4 billion. This included $2 $3 billion of Pgi managed net cash flow driven by strong institutional flows.
Those across equities real estate, and especially fixed income.
Our differentiated investment solutions, and our diversified distribution across institutional wealth and retirement channels helped generate nearly $7 billion of positive total company net cash flow year to date earlier. This month, we launched an extension of their principal brand further spotlight our investment capabilities by launching principal asset management, we can.
More clearly leverage the strong brand equity of principal while also highlighting our deep local knowledge.
Stink global perspectives and investment capabilities.
This launch aligns with investments in our client digital experience global insights program and the development of new products and alternative investment options, including model portfolios indirect lending, we're supporting small to mid sized business customers in the U S. As they continue to weather macro volatility and a tight labor market and response.
These market dynamics businesses are prioritizing wages, and maintaining or expanding benefits to attract and retain employees and it's showing positively in our results and retirement compared to a year ago reoccurring deposits in RIS fee increased 10% as the number of people deferring is up 5% the average deferral per participant.
Increased 4% the number of people receiving a matches up 7% and the average match per participant also increased 7%.
We've also seen a 12% increase in specialty benefits premium and fees over the year ago quarter over half the growth was driven by net new business as we deepen relationships with our existing customers, while attracting new customers, we're winning market share as our capabilities expertise and local presence sets us apart from the competition.
Our strategic focus on the business market and life insurance is working compared to a year ago sales of nonqualified deferred compensation and business owner solutions more than doubled for the quarter and increased 74% year to date in total third quarter life insurance sales increased 15% compared to the prior year quarter as our.
To focus solely on the business market has more than made up for the reduction in the retail market.
As we prepare for continued macroeconomic uncertainty it's important to remember that our SMB customers are more weighted to the scientific and technical sectors, which tend to be more resilient during economic downturns, and we are less exposed to the hospitality and retail sectors, which tend to be more negatively impacted <unk>.
Internationally, our business continues to grow despite macro and political uncertainty, Brazil prep, our joint venture with Banco do Brasil has the highest market share of pension AUO M. In deposits in Brazil. This combined with the continued elevated local interest rates are driving growth in earnings and Chile Cooper Ms had six consecutive quarters of positive net.
Jim the salary based upon which we earn fees as well as positive net transfers of new customers, meaning more chileans are choosing to move their mandatory savings to come from.
At our core through our business strategy company culture, and our foundation, we strive to make financial security accessible to more people and businesses around the globe to do that successfully we seek to understand the barriers to financial progress and identify opportunities to improve access and solutions. This influenced our launch of the principal global fee.
Actual inclusion index, a global research study across 42 markets that examines how well a government financial system and employer base provide the tools and support to enable greater levels of financial inclusion and help more people reach financial security through the study we can identify the structural gaps in financial inclusion and take steps to.
Dress them through strategy partnerships and recommended policy building, a more productive and protected workforce and society globally Dana.
Thanks, 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 from the annual actuarial assumption review and an update on our current financial and capital position.
Net income attributable to principal was $1.4 billion in the third corner, reflecting $1 billion of income from exited 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 corner to corner.
Excluding the income from exited businesses net income for the quarter was $395 million with immaterial credit losses.
We reported non-GAAP operating earnings of $427 million or in dollars 69 per diluted share.
As detailed on slide 12, we had several significant variances, including impacts from our annual actuarial assumption review that had a net positive impact on non-GAAP operating earnings during the third quarter.
On a pre tax basis net favorable impacts from the assumption review and Covid were partially offset by lower than expected variable investment income and Latin American car Hey performance.
He's had a net positive impact to reported non-GAAP operating earnings of $30 million pre tax $23 million after tax and nine cents per diluted share.
Then that positive $86 million pre tax impact from the annual assumption review was primarily driven by model refinements, we updated our models as part of an actuarial modernization project in conjunction with preparing for L. D. Ti. This resulted in slightly lower reserve requirements for RIS spread and individual life.
<unk>.
While we didn't change our long term interest rate assumptions. The starting point is approximately 125 basis points higher than where we expected rates to be a year ago.
Whereas we saw some positive impact from this change on the operating earnings component of the reveal the most significant impact from higher interest rates was in net income on the reinsurance U S. G block and did not impact non-GAAP operating earnings.
Specific to variable investment income virtually no income from real estate sales and prepayment fees as well as lower than expected, but still positive alternative investment returns in the U S were partially offset by favorable returns in principal international.
With approximately 40000 U S COVID-19 related deaths in the quarter, we had a positive $2 million pretax benefit as claims in individual life were more than offset by favorable impacts in RIS spread.
Total COVID-19 impacts and specialty benefits were immaterial as $1.6 million of group life and group disability claims were offset by claim terminations in individual disability.
Excluding the impacts of all of these significant variances second quarter non-GAAP operating earnings were $404 million or $1 60 per diluted share. This was a 2% decrease in EPS compared to the third quarter of 2021 as the benefit from share repurchases and strong customer growth was more than offset by Mac.
Or economic pressures on earnings.
Macroeconomic volatility continued in the third 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 margins in our S. V. M. P. G I.
Headwinds from foreign exchange rates pressure in third quarter reported pre tax operating earnings by a negative $7 million compared to the second quarter of 2022 and negative $8 million compared to the third quarter of 2021 and a negative $19 million on a trailing 12 month basis, we're taking actions across the enterprise on <unk>.
Expenses due to pressured fee revenue as we have done in previous periods of unfavorable macroeconomics, but there's a natural lag to the financial benefits.
Some expenses naturally adjust like incentive compensation and other variable costs and we're reducing other expenses, while balancing investing for growth.
Our efforts are paying off excluding significant variances, our third quarter compensation and other expenses were 4% lower than both the third quarter of 2021, and the second quarter. They increased a modest 2% on a trailing 12 month basis relative to a four 5% increase in net revenue.
Turning to the business units. The following comments on third quarter results, excluding significant variances ISP pretax operating earnings and margin declined from the year ago quarter, primarily due to unfavorable equity and fixed income markets pressuring fees and net revenue.
Momentum in Pgi continued with $2.3 million of positive net cash flow. The overall management fee rate of approximately 29 basis points remained stable despite pressures on revenues and margin from the unfavorable equity and fixed income markets and lower performance fees.
In principal international pre tax operating earnings continued to be pressured as the regulatory fee reduction in Mexico, and foreign exchange headwinds are masking underlying growth in the business.
On a constant currency basis pre tax operating earnings increased 6% over the year ago quarter and increased 9% over the second quarter and.
And specialty benefits premium and fees increased a strong 12% over the year ago quarter fueled by record year to date sales as well as strong retention and employment growth.
Pre tax operating earnings were flat as strong growth in the business and lower group life mortality was offset by higher individual disability claims severity in the quarter looking ahead to the fourth quarter, we anticipate another quarter of lower variable investment income as well as low performance fees in pgi.
Additionally, fourth quarter is typically the highest quarter for investment lineup changes and contract withdrawals in RSV as larger plans typically change providers at the end of the year.
I also want to remind you that our enterprise fourth quarter compensation and other expenses are typically higher than the other quarters due to seasonality of certain expenses like marketing and I T.
We expect the impact of seasonality will be lower this fourth quarter than our typical 7% to 10% as we're taking action to manage expenses relative to revenue.
Turning to capital and liquidity, we remain in a strong financial position and are focused on returning excess capital to shareholders.
Excess and available capital is currently estimated to be $1 $4 billion and includes approximately $900 million at the holding company slightly higher than our $800 million target.
$450 million in our subsidiaries and $100 million in excess of our targeted 400% risk based capital ratio.
We paid down $300 million of long term debt in the third quarter and improved our leverage ratio and a 22%.
This is 90 basis points lower than a year ago and within our 20% to 25% targeted range.
Despite the volatile 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 deployed $2.2 billion of capital year to date, including one $9 billion returned to shareholders and $300 million of debt reduction in the third quarter, we returned over $600 million to shareholders with $450 million of share repurchases and 157 million.
A common stock dividends.
Last night, we announced a 64 common stock dividend payable in the fourth quarter in line with the dividend paid in the fourth quarter of 2021.
Despite significant macroeconomic pressures in 2022 with the S&P 500 daily average down 14% and fixed income returns down 20% compared to our outlook. We continue to see a path to the lower end of our two five to 3 billion dollar capital return range.
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 disciplined approach to capital deployment in the current environment.
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 an aim to drive long term shareholder value. This concludes our prepared.
Remarks, operator, please open the call for questions.
Certainly, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad as a reminder, we ask you. Please ask one question and one follow up then return to the queue. You May press star two if he'd like to remove your question from the Q1 moment. Please while we poll for questions.
Our first question is coming from John Barnidge from Piper Sandler Your line is now live.
Thank you very much.
Do you have and maybe on the VII impact I think you had mentioned that you expect another quarter of lower VII in performance fees. When you had the call last quarter, you talked about it being probably positive but below expectations, which is where it ended up coming in can you maybe give an early look into that.
<unk> please.
Yeah I'll take the first start and then ask Pat if he has anything to add.
Obviously, a lot of volatility as happened in variable investment income and we've benefited from that over the last couple of years, but did see a little bit of a pressure in the third quarter as we sit here today and look into the fourth quarter. We do expect to see similar to slightly more pressured results in fourth quarter than what we saw this quarter I still think we.
It will have a positive overall return, but the alt portion of that could turn to be slightly negative in the fourth quarter.
Yeah.
I understand and prepayment income is going to be down as it has been in the third and second quarter.
In the third quarter real estate sales will again will be down.
It was in the third quarter. So we're continuing to see that being persistent as we go into the fourth quarter John .
Thank you and then as far as a follow up alternatives within principal global investors has been really strong.
Imagine the alternatives pipeline, probably has unique characteristics different in fixed income and equity given strength in what we saw in three Q on the alternative side. What is the near term outlook look like for that pipeline and then also on equity and fixed income. Thank you.
Yeah, John first of all we continue to see really strong I think support for all of our investment capabilities, including alternatives.
We continue to believe we have a very strong.
Helen offering across all asset classes.
In many markets throughout the world to continue to have confidence we can generate positive net cash flow going forward.
Particularly in terms of institutional investors.
<unk> continued to be very strong and very interested in alternatives and we continue to see increasing investor interest in alternatives really throughout the world John and I think with the opportunities that are now being created.
And investors taking advantage of potentially some disruption we continue to see a lot of engagement by investors to consider and to continuing to believe that there is compelling opportunities and alternatives as you know.
We've been very active in real estate, particularly in the four quadrants of real estate, so not only private equity, but in the debt markets.
And that I think continues to offer compelling opportunities for investors I was just in Japan and in South Korea, just arrived last night and continue to see a lot of active conversation a lot of interest in real assets private asset capabilities and compelling and even more increase in interest in specialized investment case.
Those in fixed income, particularly given the going in yields that now fixed income offering. So the pipeline continues to be robust John the activity and dialogue continues to be quite accurate.
Artists, but also across all asset classes John was that helpful.
Thank you. Our next question is coming from Erik bass from Autonomous Research. Your line is now live.
Hi, Thank you, yes first day for Deanna.
Comments about the path to achieving the low end of your total capital deployment targets for 2022, yes, taking specifically about buybacks you see a path to hitting a low in the two to two.
$2 3 billion as well.
Eric We got an awful lot of.
These static on the line so Dan I will take a shot at Mexico make sure. We're answering the question appropriately Eric I think your question was regarding the ranges that we had talked about at outlet both regarding the total return to shareholders as well as the share about buybacks range is that correct.
Yes exactly.
Okay. So.
I think as you all are aware, but I'll I'll, just reiterate it but our outlook ranges, where we're based on markets as of 12 31 of last year, which obviously is much different than what we have experienced thus far this year and I wouldn't say those ranges given really didn't contemplate the amount of macro pressure that we have seen.
Our focus is really on the total return to shareholder range as in periods of extreme volatility I would say the split between dividends and buybacks can be different than what was originally contemplated.
And so feel better about the 2.5 to three than I do about the two to 2.3 of share buybacks, given where we sit today.
<unk> been at the bottom end of that range given that amount of volatility.
Volatility that we've seen is a very strong result, and I'm also confident in that 75% to 85% of free cash flow.
We have targeted and are continuing to see as we look at results sitting here today. So you know obviously, there's a lot of moving parts in that macro uncertainty does play into that and as as Dan mentioned will continue to be prudent and disciplined relative to our capital levels and capital return follow up Eric.
Yes, and thank you for those comments Dan maybe a question for you just hoping you could provide an update on the expected timing of closing.
And the China JV.
Yeah, Okay very good I think that's the update on the China.
Situation again again, a lot of static on the line Eric So we actually feel very good about where we stand with China for those who are less familiar we've had a joint venture venture relationship with CCP back to 2005. This past summer we received the regulatory approval to become a shareholder we're in the final.
<unk> around the revisions to the articles of association as well as to update the register and and to update the exchange we feel very good about that that would make us only one of three foreign providers of retirement services in the country. I'd also remind you that it includes pillars, one two and three which is around the <unk>.
National Prudential retirement savings the enterprise annuity and lastly, the retirement funds of funds all of which by the way we do business here in the United States. So at this point in time, the conversations are healthy and we remain optimistic and reaching final conclusions to the negotiations here in the very near future does that help Eric.
Yes. Thank you.
Yeah.
Thank you. Your next question today is coming from Alex Scott from Goldman Sachs. Your line is now live.
Hi, first one I have is on the expense commentary.
Appreciate that there's there's revenue pressure and you know I think the average daily value comps begin to be a bit more challenging as we get into next quarter and so it was just interested if you could provide any more color around what we should expect in terms of temporary reductions in margins and you know what let's say.
Reasonable way to think about timeframe for something like that you know I would think short term outlook would you know.
Probably be reasonable do it to a.
To kind of contemplate some of these things so any color would be helpful.
Just a couple of quick comments before throwing it over to Deanna, Eric We've got Alex a very strong track record of going after expensing aligning it with revenues while at the same time, we know we have to invest in the businesses around capabilities and technology and client experience, but again I think our track record holds up quite well.
Dan has been here, a big part of that and overseas.
Function on a very daily basis, though Dan Yeah, just a couple of questions. You know obviously as we sit here today, we have kind of three levels of activities around thinking about our expense levels. You know one we have Chris and his team very focused on making sure that we deliver on the synergies from our IRT integration.
We also have stranded costs from our transactions around retail fixed annuities and U S. G. I'd say on both of those were actually running slightly ahead of where we thought we would be relative to those and then add on that kind of the third one which we obviously don't ignore which is the pressures that the current macro environment.
It had on our revenues and in how we ultimately need to get our margins back in line and you know that takes some time there is some lag in when you pull levers and when that actually shows up but I'd say the team is collectively focused on that while still making sure that we don't sacrifice any investments that's going to ultimately drive long term.
Shareholder growth you know I I talked about in the prepared remarks, you know if you look at whether you look at third quarter. Our trailing 12 months I think our expenses are are looking really good and if I actually go to a kind of a full year look I'm sitting here today, we actually expect our expenses to be down in 'twenty two.
<unk> to 'twenty one.
And feel good about continuing to address that as we move into 2023.
Oh got it.
Yep.
The other one I had is just on the commentary you provided on our I S fee around it at the end of the year. There. There's you know a bit more changing hands at plants than at other times during the year. This year in terms of switching I think it's been more benign near I think in recent years because of the pandemic.
And are you seeing any evidence that that's picking up this year and you know I actually I just wanted to see the should I interpret that.
Piece of the commentary is that as an opportunity or a risk for you or do you expect to be a beneficiary of switching.
That's where the question Sir.
Chris Please.
Yeah. Thanks, Alex Thanks for the question so.
As a reminder, and I think as Dan pointed out in his remarks, the underlying fundamentals of the RSP business. So a really really strong with strong recurring deposits.
Strong client retention year to date.
Strong deferrals and matching performance. So we're seeing really strong underlying drivers.
That being said, we certainly are seeing an uptick in participant withdrawal activity and some contract lapses and so we generally do see seasonality in the fourth quarter as Deanna pointed out.
Its investment lineup changes are made and as plans changed at all for the January one year. So we would expect to see some of that we do expect that there may be some pent up demand.
And that as well, but we are expecting the full year to be a positive from the avian net cash flow basis, and we're sitting at about $5 4 billion positive year to date. So I mean, we feel like we're in a good position with a strong underlying performance, but we do expect to see some some higher outflows in the fourth quarter.
Got it okay. Thank you.
Thanks, Alex.
Your next question today is coming from will Novartis from Raymond James Your line is now live.
Hey, good morning.
A question for Amy I, just wanted to get some color on the elevated individual disability claims I think it was on severity could you give us some color if it's concentrated in a few large claims or anything else.
Thanks, Shlomo for the question Jami, Yeah sure. Thanks, again, and so I don't see it concentrated primarily in large screen. So just to clear a couple of questions on that you know not COVID-19 related I don't really see it as a couple of large claims I look at it more is when I look at severity when you take them.
Apart the pieces it was more elevated severity on the new claims that came in this quarter and then the claims that recovered or terminated had a little bit lower severity. So just the combination of those two factors sort of move that results around I do want to note trailing 12 months is a much better metric to look at to look at trends.
So when Youre looking at this year's trailing 12 months versus last year's trailing 12 months, they're virtually identical. So we're not really seeing a trend there and it's also probably worth noting that in fourth quarter 'twenty. One we saw very similar kind of variance to the loss ratio, but on the positive direction.
So the full year results are really more helpful to look at across the block so.
No concerns from my perspective, the additional color I would have is this is normal noise that comes in on a quarterly basis.
I loved the role that income protection plays in our product.
<unk> portfolio and I'm very comfortable that we're managing it.
That makes sense and sounds like a little bit.
Your body.
Nova lifestyles really strong up 15% and then I think that was a lot more if you're just talking about the business side.
That's something that's sustainable or.
Usually like sales are a bit more mild so okay.
Looking for some color.
Yeah, and I'll have Amy follow up here on the details, but I just want to reiterate one with it when we came out to investors and Reframed. Our go forward strategy. It was very intentional around this business market because we saw the potential and we saw the diverting these energies towards this opportunity was significant so we're not surprised.
Is it by the take up in the marketplace and having our teams really focused and frankly, the economic environment, perhaps up until within the last six months would lend itself to business owner executive solutions, and and nonqualified deferred comp it Amy or your outlook here, Yes, no you've got it right Dan.
When I look at the outlook what I see is there probably was from last year or the year before a little bit of pent up demand on the nonqualified side. So there might be a little bunch. He missed in terms of what we're seeing on nonqualified. This year that doesn't continue exactly in pattern next year, but what I'm also seeing is the pick up.
On our business owner and executive solutions story has been really strong. So I I would look at head for strong growth and strong sales pattern within that business owner marketplace as well as that nonqualified and coldly marketplace.
Thanks Shlomo.
Thank you.
Thank you next question is coming from Ryan Krueger from K B W. Your line is now live.
Hi, Thanks, Good morning, I had a question on the ARIA E E rate.
Probably the more challenging than normal to calculate it from our end because we don't have the right average account value, but it did look like the fee rate went up at least some.
This quarter relative to the last few quarters, So I was hoping.
You could comment on.
And also.
To what extent some of the IRT recordkeeping business may may be linked to more to participants.
Asset values.
Very good Chris was.
Yeah. So I'll take the first one the last one first so on the IRT, yes, certainly on the large end of the market and some of those customers arent more tied to participant fee rates than on our asset.
Asset values. So that that is that's certainly as is the case.
With respect to the fee rate with we certainly are seeing some benefits in our.
Principal branded capture and as well as a shift in.
In the G. A guaranteed products, which are providing a bit of a revenue left obviously, you're not in a risk off environment. The guaranteed products attract more flows and those generate a bit more revenue for us. So that's where you're seeing a little bit of that left obviously that can change depending on what happens with markets, but we are definitely seeing some of that.
Benefit coming through.
Got it thanks, and then I guess just.
Yes.
Margins.
I guess, Kevin you got it originally that 25% to 29% for the year, obviously markets are.
Headwind, but yes.
Any thoughts on how to think about the margin trajectory as you know maybe once he takes on the expense actions.
Yeah.
Yeah, I think I'm certainly that yeah that original guidance was tied to original macro environment, we're hitting significant headwinds not just on the equity side, but also on the fixed income side. So that is having an impact so I would say what I would say as far as we're willing to go out I think the third quarter is probably a good read into the fourth.
Order, where you think that those trends will be relatively consistent.
And then as we get into 'twenty three we got a lot of noise around L. D. T I and we'll try to provide updated guidance on our outlook called in the first quarter and around the one thing and I covered in my prepared comments and Chris hit on it as well if you look at those underlying fundamentals of growing the number of participants the deferrals the reoccurring deposits the matching contributions.
The most recently passed for 2023 higher limits for deferrals in.
The potential retire secure 2.0, theres just a lot of.
Support for the workplace for people to save for retirement, So again I think most of the diminishing in the economics, there was attributable to the macro as opposed to the underlying fundamentals of the business. Thanks for the question.
Okay.
Thank you next question is coming from Tom Gallagher from Evercore ISI. Your line is now live.
Good morning.
First just a D N a follow up on on the buybacks I just wanted to make sure I've understood.
Your position on it correctly so the.
It sounds like you are going to come in below the $2 billion.
For the year from what you said, but.
But would you say this quarter is $450 million is a reasonable run rate to expect for Q4 or should we expect something lower than that.
I think it would probably be in that range.
I'd say that while there's two wildcards there right. The one wildcard would be awareness macro kind of end up and how that relates to fee levels and ultimately earnings for the quarter, and then again thinking through Canada recession outlook, and whether you decided to go.
Go all the way down to your targeted levels or if you kept a little bit of dry powder. As you go into 'twenty three and then deploy as you you kind of get more clarity on the recession I think we'd be in that ballpark on having the ability to deploy but we can take that second is obviously being very prudent and discipline them and ultimately making sure we.
More clarity on the on the economic outlook into 'twenty three.
That's that's helpful. And then my follow up is just a question on Pgi revenues.
I'm just trying to get a sense for the transactional type revenues I think I think I for the most part have my arms around the fee revenue stream there.
But when I try and quantify kind of a ballpark range of transactional type revenues I get to something around 10% of your total revenues could you give.
Give me some sense for whether that's directionally close and and if so any commentary on where you would expect those revenues to trend over the next couple of quarters, whether you would expect pressure or do you think those might be.
Stable or go up thanks.
Please yes, Tom but transactional revenue would be predominantly whether we have more performance fees or whether we have more on this fees coming off by origination operation within the.
Private asset classes, and I would say on the.
First the performance fees My guess, we will see some muted performance fees for next.
A couple of quarters ahead, I think the market condition is don't really allow for us to take advantage and as mentioned we want to in terms of harvesting some of the games, we have in our real estate portfolio.
We think there is probably a better entry point when transaction volume start to increase in the marketplace. So that was probably be muted for the next couple of quarters and transaction fees relative to our mortgage origination and other sort of debt origination activities. My guess those will continue to be pretty consistent as we go into the next quarter or two time.
Got it thanks.
That does thanks.
Okay. That's the question I forgot.
Our next question today is coming from it's really come up from Jefferies. Your line is now live.
Thanks. So so you guys have some unique perspective, given your focus on the SMB market and from listening to what you're saying about trends it doesn't seem like.
Your customers are behaving in a way that would.
The recession is going to happen next year, even though it's been probably the most telegraph recession I think we've ever had so just curious like what are you hearing from your customers I don't know if you want to take it from our I S fear or even specialty benefits I mean, how are they preparing for what's gonna be a potentially a challenging economic environment next year.
Ironically enough. We've just had a lot of touch points I know, Chris held a client conference where he had his clients circle, but Amy just literally within the last two weeks is back from the ink 500, where we had a chance to hear directly from a lot of our clients and smbs more broadly. So let me have Amy make her comments and then maybe.
Chris can pile on Amy Yeah, Sidney Yeah, I mean, they they understand and they do believe that there is a recession that could happen. So I don't I don't get the sense from talking directly with business centers and then relying on some of the primary research that we do with things like the wellbeing index, it's not that they don't.
I understand that there's a recessionary risk out there it's more that they've had to fight so hard for getting the right talent.
Finding them and placing them getting them in the right sort of tranche of the wages that seen as competitive that they're staying in the list of activities I would take against recessionary pressures. This isn't the top of my list. So we think the good news is if you're in the retirement business if you're in the benefits business, they're saying that's not.
Where I'm Gonna go first to take action to try to manage through recessionary pressures. So one of the reasons you're hearing I think as much positive sentiment from us is because we're seeing through our conversations and through our primary research that they're simply not going to go there first.
Chris anything to add.
I think that's right I mean, I think certainly theres been this competition for talent and it continues to benefit our businesses and they are really going to pulling lab run on people first.
Do you have a follow up.
I wanted to pivot to capital real quick if I could just Dan on your comments on share repurchases and kind of the macro outlook can you just provide some sense in terms of what youre seeing on the balance sheet in terms of asset classes, maybe a watch list I mean, just I know you said that it makes sense to have some caution going into next year, but just curious what your if anything.
<unk> focused on.
In terms of where we could see some pressure thanks.
Yeah, I'll I'll, maybe take a little bit of a flavor there and then ask Pat to add on you know we feel really good about our balance sheet and obviously are our exposure to credit it was lessened as out out of the actual transaction you know actually if we sit here today, we're going to see them there.
Very modest impact from drifts and impairments as we sit here into 'twenty two are expecting slightly more as we think about 'twenty 'twenty three mm, but really take a really deep look both from a top down and a bottom up approach and don't see any real problem area.
Yes, or quality and as you see in the appendix of our DAC is in a very very high level and and we feel really good about where we're at having said that you know obviously with a recession on that we need to continue to be disciplined.
As I said, our credit exposure on our balance sheet will position us well as we move into 2023, but Pat do you have anything to add there, yes, I think there's a couple of things and.
Obviously, we're very very respectful of the environment we're in.
We actually have a great deal of Hopkinson portfolio itself position I would say, we technically have position a bias to pencil out to be a little higher quality and assets given the sort of market conditions right now and our new money investing is more defensive.
And look at our portfolio of high yield portfolio is very defensive and it's skewed towards that will be investments somewhat defensive there I think our structured securities portfolio by 95% is a single a or higher.
We have a very strong track record of performance in real estate. So we've done a very deep dive in commercial mortgages and our real estate holdings and that seems to hold up very well our overall portfolio in the mortgage portfolio is a 45% loan to value and two one times debt service coverage. So as we continue to examine and to continue to have a very disciplined intentional.
Coach on our portfolio I think it's well structured well positioned for a recessionary environment.
Appreciate the questions me, yes, thanks, Dan.
Thank you next question today is coming from Tracy <unk> from Barclays. Your line is now live.
Thank you I wanted to follow up on your comments that you expect low performance fees in pgi in the fourth quarter can you speak to some of the underlying performance you're seeing so far quarter to date that helped inform that deal.
Yeah. So in terms of the real estate markets, where we've had most of our performance fees generated Tracy we are starting to see clearly some valuation reductions and the private equity space.
And I think that would be sort of a no surprise given the macro environment and the continued I think slowdown in the demand curve relative to the aggressive central bank.
Monetary policy. So there is a I think a pause going on relative to valuation increases and we'll probably see some diminishing in value values over the next two to three quarters to reflect the demand function that.
Hello.
Please standby, ladies and gentlemen, please standby for one moment.
Ladies and gentlemen, please standby.
The speakers line Youre not disconnect. Please stand where they are now reconnected. Please go ahead.
Tracy did you get that response it looks like there was a technical difficulty there.
I think I got most of it thank you.
I'll move on to my next question I.
Trying to do a read through on your assumption update I guess going into the quarter I didn't think life insurance would transition into L. D Ti, but it feels like you're doing that in a way. It give me your comments on the bottle model up the right individual life. It just feels a bit transitory.
Wanted to know if I'm thinking about this the right way.
Yeah, transitory and complex, but deanna will respond accordingly, yeah Tracy. Thanks for the question you know obviously you know we don't officially transitioning all DTI until early 'twenty three but we've been on a journey for a couple of years now getting prepared for that and part of that is obviously to be comply.
But it also afforded us the opportunity to go back and kind of modernize our systems and our processes and we converted a lot of our actuarial balances to a new system and a lot of that was completed I'm not intentionally but around the same time as when we did the.
Actuarial review and so we felt like it was prudent to actually incorporate what we were seen in changes in those reserve values.
Into the into the Street view them. So what you saw there and you know again about 80% of the impact of the E. R was and model refinements.
You know that that is a number that that's more sizeable than what you might expect but actually it was right around about a 3% reduction in the reserve balances, especially on the PRT business, so very slight reduction and that but because we had just completed that we.
Felt it made sense to actually reflected in our results.
Okay.
Okay. Thanks for the question Tracy Thank you.
The next question is coming from Josh Shanker from Bank of America. Your line is now live.
Yeah. Thank you for taking my question I wanted to talk about Mexico and understand what's the regulatory featuring is there what's the future of that business looks like and whether our principle is still the best owner for that kind of business.
Yeah. It's a good question Josh appreciate that and this is something that we also review on an ongoing basis for those of you who are less familiar with what's transpired in the for a business. The regulators reduced the maximum amount you can charge related to the asset fees for purposes of providing this.
Compulsory model within the afore in Mexico.
We have we have already divested ourselves in Mexico on the life and annuity business, we have an institutional retail and retirement asset management business as well as the Safari, which again, we managed a lot of those assets. So we're looking at that very closely for what's necessary to be successful around scale and capabilities.
Just last week, we had our Mexican.
Board meeting here in <unk>.
The following day, we actually held Brazil. So I would just tell you that we are taking a very close look at it. It is something that is top of mind for us looking for the right path forward and as we've shown in the past strategically we will make the right decisions to.
To be successful long term Deanna, yeah, Josh the only thing I would note there and I know, you're probably aware of that but the regulatory change actually frontloaded the reduction in the fee prior to them actually increasing the deferral percentages and so we will see some incremental benefit from.
Over the next few years as that feet not the deferral rate goes up I think it's 1% a year.
And so that will start in 2023 and flow through our results that help Mike.
Yeah Yeah.
That's great and then Mark and I sort of talked about it was Scott last night, but want to just confirm theres nothing trending in individual disability here with the numbers. It's just some quarters have a frequency pop and there's nothing that you see going on through for Q 'twenty two that gives you any.
Reason to believe that it doesn't back off.
Jamie as it keeps me up at night.
Its not keeping me up at night, we've looked at industry. We've looked at diagnosis, we've looked at region I'm very comfortable that there's nothing that's emerging as a trend. If if there is we'll be transparent about that well, let you know if we're worried about it again I'd go back to you in fourth quarter of 'twenty. One we saw an almost equally sized positive variance in the same block.
And so again, it's better to look for trends in the trailing 12 months and we're not seeing anything there.
I get the question.
Yeah.
Thank you next question is coming from Michael Ward from Citi. Your line is now live.
Hi, guys. Thank you for taking my question I guess I'm just wondering if you could maybe update on the.
Level of interaction you might be having with the activists from last year and kind of how you're thinking about your business mix going forward should we think about you as doing more or considering more divestments or on the other hand should we think about you know you may be even getting a acquisitive given the capital flexibility and I'm I'm kind of thing.
And you know a year or two from now.
Yeah, you know what I would say is we're out talking to all of our shareholders on a very regular basis and that's a regular part of what Deanna and I do and I would tell you that and many of them are on this call. Today. There is broad support for our go forward strategy, we've been sharing our insights and perspective on what's working and what's not working.
But again this diversified business model that we have resonates with investors our capital deployment strategy has resonated with investors our commitment to the common stock dividend of 40% payout has resonated and so we believe we already have in place what needs to happen and a lot of the burden now is on us for continued <unk>.
<unk> loved the SMB market love, what Pat and his team are doing around asset management that really provides the jet fuel for us to drive our international and domestic businesses and as you've heard Amy discussed today that insurance business continues to get more focused and refined and it fits with the overall enterprise strategy.
So I.
I would say all investors have found that.
The new go forward strategy is the is the proper one.
Did you have a follow up to that Mike.
Thank you Dan yes.
I appreciate that but just quickly on RIS fee again kind of accurate echoing questions on the fee rate, Chris I guess I interpreted your comments to potentially mean that part of why our I S. T revenues are hanging in there as.
Really from inflows to what I think would be variable annuities with guarantees.
I was wondering if you could clarify that and then maybe you know is there any chance you could help quantify the contribution to earnings for RIS fee that comes from V. I.
Yeah. So let me make sure I add back up on this on the fee rate here, because it's not related to to be a it's it's really about.
The benefit that we're seeing from he's certainly.
The higher.
Investment yields that we're getting from G. A flows so guaranteed product flows right. So again as you see market volatility you do see people, taking on higher allocations of guaranteed products, which generally drive generally better revenue for us.
We also for clarity see some benefits from P. B S P, which we've talked about in the past. So those increases in interest rates also flow through our P. B S. P and we get an uplift on that and the revenue rate as well so it's unrelated.
Two two to V a.
Thanks, very much that's very much. Thank you.
Okay. Thanks for the questions. Thank you we have reached out of our question and answer session I'd like to turn the floor back over to Mr. Helfand for any further or closing comments.
Thank you operator, and maybe just piling on Smeets observation about the market is telegraphing a recession.
We don't know if it is or it isn't.
We do anticipate Volatilities, we have in these last hundred 43 years I've been here for the 38 of those antibody every seven to 10 years, you do see a market dislocation and disruption and we've got a track record of managing expenses growing revenues.
Serving the needs of our small to medium size business and institutional customers aligning.
Expenses with our revenues and making sure that capital deployment is very responsible. So again. This management team has been through this cycle before and whatever deals us we'll manage it accordingly, and we look forward to being on the road here in the next few months before the next earnings call updating you on some of these factors so with that.
Have a great weekend. Thank you.
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