Q4 2022 Principal Financial Group Inc Earnings Call

Good morning, and welcome to the principal financial group fourth quarter 2022 financial results Conference call. There will be a question and answer period. After the speakers have completed their prepared remarks.

We would like to ask a question at that time.

Requests 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 be respectful of others just 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.

Okay.

Thank you and good morning, welcome to principal financial group's fourth quarter and full year 2022 conference call as always materials related to today's call are available on our website at investors don't principal dot com.

Following a reading of the safe Harbor provision CEO , Dan Houston, and CFO Deanna Strabo will deliver some prepared remarks, then we'll open the call for questions. Others are available for Q&A include Chris Littlefield retirement and income solutions.

Uh huh.

Global asset management and.

And Amy Fishery U S insurance solutions.

Some of the comments made during this conference call may contain forward looking statements within the meaning of private Securities Litigation Reform Act.

The company does not revise or update them to reflect new information subsequent events or changes in strategy risk.

Risks and uncertainties that could cause actual results to differ materially from those expressed or implied I'll discuss in the company's most recent annual report on Form 10-K filed by the company with the U S Securities and Exchange Commission.

Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures.

Installation 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.

Our 2023 our call is scheduled for Thursday March 2nd wherever it was sheer enterprise and business units 2023 and longer term guidance on Wednesday March 1st we plan to release, a recast fourth quarter 2022 financial supplement. It will include the impact of the targeted improvement for us.

Long duration insurance contract accounting guidance.

L D Ti, which goes into effect with our first quarter 2023 reporting.

Dan.

Thanks, Humphrey and welcome to everyone on the call.

Morning, I will discuss the milestones we achieved in 2022 as we executed on our strategy along with key highlights from our fourth quarter and full year 2022.

Deanna will follow with additional details on our fourth quarter and full year 2022 financial results, our current financial and capital position as well as an update on L. DTI.

In 2020, one we outlined our strategic path forward, one balanced with a focus on a higher growth more capital efficient portfolio and a commitment to return more capital to shareholders. This guided our successful execution in 2022, despite a challenging macroeconomic environment we.

We've made meaningful progress towards our goals and continue to invest in our long term growth drivers of retirement global asset management and benefits and protection in January we announced an agreement to reinsure, our U S retail fixed annuity and universal life insurance, where secondary guarantee blocks of business.

The transaction closed in May and was a key milestone.

Reinforcing our strategic focus on continuing to evolve into a higher growth higher return more capital efficient portfolio, while improving our overall risk profile, we delivered on our strengthened capital deployment strategy and our commitment to rightsize return the excess capital that we had built up during the pandemic with $2 $3 billion.

Returned to shareholders in 2022 through share repurchases and common stock dividends, we've continued to adapt to the volatile and uncertain macro environment and have taken appropriate actions to manage our expenses with pressured revenue while continuing to serve the needs of our customers invest for growth and deliver strong total shareholder return.

Starting on slide two we reported $1 $7 billion of full year 2022, non-GAAP operating earnings or $6.66 per diluted share excluding significant variances earnings per share increased 2% over 2021.

<unk> result, given the pressured macroeconomic environment.

As shown on slide three we reported $422 million of non-GAAP operating earnings were $1 70 per diluted share in the fourth quarter. We entered 2022 was $635 billion of total company managed AUM unfavorable equity and fixed income markets pressured AUR throughout 2022.

And $23 billion was transferred out in the second quarter as part of the reinsurance transaction turning to investment performance on slide five our long term performance remained strong, particularly in our specialty fixed income strategies the volatile markets impacted our short term investment performance throughout 2022 is our investment style.

<unk>, which is focused on high quality growth stocks was out of favor for much of the year.

During a volatile and pressured year for asset managers, we generated a positive $3 $9 billion of full year total company net cash flow. This was $1 billion higher than our 2021 net cash flow and included $4 $4 billion of positive Pgi managed net cash flow still shows a very strong resolve during a period.

Outflows across the industry.

The positive net cash flow in 2022 was driven by strong institutional flows across equities real estate, and especially fixed income highlighting the value of our diversified distribution through our institutional retail and retirement channels.

Fourth quarter total company net cash flow was negative $3 billion net cash flow is typically negative in the fourth quarter for both pgi and RIS fee <unk>.

Similar to other asset managers, we experienced retail platform outflows during the quarter as customers move cash to the sidelines.

While market volatility can impact the timing of when new mandates fund, we're seeing positive momentum with our institutional clients.

Early in 2023, we have meaningful commitments for several of our fixed income and special equity strategies, which are expected to fund in the first quarter. The committed pipeline for our real estate products is healthy which will likely start funding in the second half of the year.

Turning to our growth drivers and some additional highlights for the year.

In retirement, we continued to solidify our position as a top retirement provider as we completed the integration of the IRT business in early 2020 to.

The acquisition provides us with new capabilities additional revenue generating opportunities and expanded distribution relationships.

R. I S V contract lapses contributed to negative account value net cash flow in the quarter. The fourth quarter is typically the highest quarter for lapses as players often change providers at the end of the year roughly one third of the lapsed account value was related to a single low fee large case with no principal managed assets.

Looking ahead to the first quarter, we anticipate positive net cash flow in light of our sales pipeline the underlying fundamentals of the retirement business were strong throughout 2022 compared.

Compared to full year 2021, total reoccurring deposits increased a very strong 26% with a 14% increase on our legacy block. This was driven by employment growth and wage inflation as well as increases in participant deferrals company matches and higher incentive compensation. We also saw great opportunities in the future with the <unk>.

So Jeff secure 2.0, a bill for which we advocated this legislation expands in the U S retirement market overall, creating greater access to retirement savings plans for businesses and improving long term savings and financial security for Americans why don't I'll take time and won't have an immediate impact we expect that the bill will drive increases in new.

Plant formations employer matches as well as employee participation and deferrals, all of which will help support better retirement readiness and long term growth in our business.

We're uniquely positioned to benefit from secure 2.0, thanks to its focus on small and mid sized businesses and its support for more cost effective startup plans were.

We are already leaders in this market and applaud the additional options for workers to save more for retirement.

Outside the U S. We continue to focus on markets with compelling growth opportunities, where we can leverage our local and global asset management capabilities and lean into established local partners.

During the fourth quarter, we extended and strengthened our asset management partnership with C. I M. B in southeast Asia and at the end of the year, we closed our transaction with China Construction Bank pension management company acquiring a minority ownership stake in the pension company. This is expected to be immediately accretive and grow over time.

Both opportunities expand our existing partnerships with more than 17 years with these market, leading wealth management mutual fund and pension distributors.

In global asset management, we continue to unify our investment footprint across more than 80 markets. We serve demonstrated by the launch of principal asset management in October and increasing integration with principal international we continue to expand our specialty offering in 2022 as an example, our direct lending team doubled its committed capital and increase their <unk>.

Foothold in the middle market throughout the year principal asset management has once again been named a best place to work in money management by pensions and investments. This is the 11th consecutive year. We have earned this recognition and it's a testament to the work of our employees to create a positive culture and deliver results for our customers and benefits and protection our folk.

On the small to medium size business delivered strong results in 2020 to the businesses, we serve prioritize providing benefits to attract and retain employees throughout the year.

Record sales strong retention and employment growth is evident in specialty benefits results, we deepened our relationships with existing customers attracted new customers and expanded our market share, especially benefits premium and fees increased a robust 11% year over year exceeding the top end of our guidance range with over.

Half of the growth coming from net new business full year sales increased 19% compared to 2021 with continued strong momentum early in 2023, our focus on business owner and our diversified set of solutions continues to drive results in individual life insurance for your business market sales hit record levels.

Up 73% year over year. This growth included record Nonqualified coli sales approximately 50% of these sales were with our retirement plan customers highlighting the value of our integrated business model, we're delivering on our go forward strategy transforming our portfolio of businesses, resulting in a higher multiple.

Paul and increase shareholder value, we have derisked, our portfolio reduced our balance sheet risk and are less capital intensive.

We have sharpened our focus on higher growth markets investing in our business and leveraging our competitive advantages all while returning more capital to shareholders.

While 2023% so its own challenges, we have a good line of sight and confidence in achieving our long term financial targets Deanna.

Thanks, Dan Good morning to everyone on the call. This morning, I'll share the key contributors to our financial performance for the quarter and full year, our current financial and capital position as well as an update on L. D T I.

Full year reported net income attributable to principal was $4.8 million excluding income from exited businesses net income was $1 $5 billion for the full year with manageable credit losses of $48 million.

Fourth quarter non-GAAP net income, excluding exited businesses was $504 million with $12 million of credit losses.

As a reminder, the income from exited business is noneconomic and is driven by the change in the fair value of the funds withheld embedded derivative importantly, it doesn't impact our capital our free cash flow and can be extremely volatile corner to corner.

We also had positive credit draft during the year further demonstrating the quality of our balance sheet.

We reported full year non-GAAP operating earnings of $1 $7 billion or $6.66 per diluted share, including $422 million or $1 70 per diluted share in the fourth quarter.

Excluding significant variances full year non-GAAP operating earnings was $1 $7 billion or $6.77 per diluted share. This included $420 million in the fourth quarter or $1 69 per diluted share.

Compared to full year 2021 we increased earnings per share, 2% as the benefit from share repurchases and strong customer growth was partially offset by macroeconomic pressures on earnings.

As detailed on slide 15, we had several significant variances that virtually offset and had a slight net positive impact on non-GAAP operating earnings during the fourth quarter.

On a pretax basis benefits from lower DAC amortization higher than expected Latin American car high performance and favorable Brazilian inflation more than offset lower than expected variable investment income.

These had a net positive impact to reported non-GAAP operating earnings of approximately $5 million pre tax $2 million after tax and one cent per diluted share.

While variable investment income was positive for the quarter, we experienced lower than expected alternative investment returns and prepayment fees and real estate sales.

Macroeconomic volatility continued in the fourth quarter and pressured earnings in our fee based businesses. The S&P 500 daily average decreased 3% from the third quarter of 2022, 16% from the fourth quarter of 'twenty, 'twenty, one and 4% on a full year basis relative.

Relative to our 2022 outlook the full year 2022, S&P 500 daily average was 17% lower than we expected heading into the air and fixed income returns were approximately 18% lower.

This unfavorable market performance negatively impacted AUM account values fee revenue margins and earnings in RIS fee and pgi throughout the year.

Headwinds from foreign exchange rates pressured reported pre tax operating earnings by a negative $5 million compared to the fourth quarter of 2021 and a negative $21 million for the full year.

It was immaterial compared to the third quarter of 2022.

2022 we took actions across the enterprise to manage expenses as fee revenue was pressured as we have done in previous periods of unfavorable macroeconomics.

Our efforts have paid off on a full year basis compensation and other expenses, excluding significant variances were 3% lower than 2021 and fourth quarter expenses were 8% lower than the fourth quarter of 'twenty, one despite approximately $15 million of elevated severance and restructuring expenses across the fee.

Debased businesses in the quarter some expenses naturally adjusted throughout the year like incentive compensation and other variable cost and we took actions to reduce other expenses, while continuing to balance investments for growth.

As a result, we didn't see the typical 7% to 10% increase in compensation and other expenses this fourth quarter relative to the average of the first three quarters.

Turning to the business units the following comments on fourth quarter and full year results exclude significant variances.

Our S fees margin improved in the fourth quarter, but ended the year below guidance as the benefit from IRT expense synergies was more than offset by unfavorable market performance, which pressured fees and that revenue throughout the year.

Through the end of 2022 we've realized more than $80 million of run rate expense synergies and are well on track to realize the full $90 million in 2023.

Our S spread net revenue and gross and pre tax margin exceeded our post transaction guidance for the full year.

Favorable investment income a benefit from rising short term interest rates and growth in the business helped to offset the impacts of the reinsurance transaction.

We completed $1 $9 billion of pension risk transfer sales in 'twenty, 'twenty, two including more than $750 million in the fourth quarter.

The PRT pipeline remains very strong as we head into the first corner.

P. G is pre tax margin was 39% for the full year and at the low end of our guidance range, despite significant macro headwinds throughout the year.

The overall management fee rate of approximately 29 basis points remained stable.

In principal international pre tax operating earnings were pressured throughout 2022 as underlying growth in the business was masked by the regulatory fee reduction in Mexico, and foreign exchange headwinds on.

On a constant currency basis full year pre tax operating earnings increased 5% over 2021 with strong growth in Brazil and Chile.

And specialty benefits pre tax operating earnings in premium fees, both increased a strong 11% over full year 2021.

This was fueled by record sales as well as strong retention unemployment growth, while maintaining disciplined expense management and a stable loss ratio.

Turning to capital and liquidity, despite the volatile environment, we remain in a strong financial position heading into 2023.

We ended 2022 with $1 $5 billion of excess and available capital. This is above our targeted levels as we felt it was prudent to be disciplined due to the uncertain and volatile macro environment.

This included approximately $1 billion at the holding company $200 million above our $800 million target.

$425 million in our subsidiaries and $80 million in excess of our targeted 400% risk based capital ratio estimated to be 406% at the end of the year.

Our leverage ratio is low at 22% and within our 20% to 25% targeted range.

We have the financial flexibility disciplined and experience necessary to manage through this time of macro volatility and uncertainty.

As shown on slide four we returned $2 $3 billion to shareholders in 2022, including nearly $1 $7 billion of share repurchases and more than $640 million of common stock dividends.

We also deployed $300 million to debt reduction and approximately $200 million towards M&A, bringing our full year capital deployments to $2.8 million.

In the fourth quarter, we returned more than $400 million to shareholders with $250 million of share repurchases and $156 million of common stock dividends.

Last night, we announced a 64 common stock dividend payable in the first quarter in line with our targeted 40% dividend payout ratio, we remain focused on maintaining our capital and liquidity targets at both the life company and the holding company and we will continue with a balanced and disciplined approach to capital deployment as we head into 'twenty.

'twenty three.

Our investment portfolio is high quality and a good fit for our liability profile.

The commercial mortgage loan portfolio is very high quality with an average loan to value of 46% 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 disciplined asset liability management.

Additional details of our investment portfolio are available in the appendix of the sides.

As a reminder, L. D T I goes into effect in the first quarter importantly, this 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 plan to release, a recast fourth quarter supplement on March 1st the night before our 2023 outlook call.

The most notable impact to total company non-GAAP operating earnings is a change to the geography of some variable annuity fees moving the hedging related fees below the line. This will reduce our operating earnings by approximately $60 million on an annual basis with no corresponding impact on net income free cash flow generation or our cash.

But our position.

In addition, there will be impacts to segment earnings that will largely offset at a consolidated level more details will be shared during our upcoming outlook call me.

Moving to equity the transition impact from the adoption of L. D. T. I will decrease total stockholders' equity by approximately $5 $3 billion as of January 1st 2021 with nearly all of the impact in a OCI sitting.

Sitting here today, we expect the impact of stockholders' equity from L. D Ti to be slightly positive as of the fourth quarter of 2022 as interest rates have risen significantly from where they were at the beginning of 2021.

2022 as a transformative year for principal as we completed the reinsurance transactions Mindy are executed on our go forward strategy and strengthened our capital management and deployment approach.

We're focused on maximizing our growth drivers of retirement global asset management, and benefits and protection, which will drive long term growth for the enterprise and long term shareholder value.

This concludes our prepared remarks, operator, please open the call for questions.

Yeah.

Okay.

At this time I would like to remind everyone that you ask a question press Star and then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Okay.

Okay.

Our first question comes from John Barnidge with Piper Sandler. Please proceed with your question.

Thank you very much and good morning, other asset managers have announced employee count reductions given lower assets no.

Are always has expense discipline approach with expenses down enterprise wide and there was a comment about severance in the sheet business.

Can you maybe.

Talk about how you're viewing staffing levels in Pgi Youre, maybe more color on that separates in the fee business. Please.

Yes, good morning, John good to hear from you.

Just at a high level as I said in my prepared comments you know this this is something we do every day every quarter every month and to align our expenses with revenues again credit goes to bed in Kabul for their discipline within Pgi and I think in what he'll talk about is not only steps we're taking in right sizing, but also places where we're investing.

Sting, adding talent to build out organic capabilities too.

Meet investor demand soap athletes, yes, John Thanks for the question, maybe just to kind of set the stage as Dan mentioned, we're very focused on operating margins and as you saw in the first quarter operating margin dipped a little bit below 37% 36, 8%, which is down from the third quarter of $38 four.

And that was clearly pressured as you highlight in terms of the volatility investor risk aversion and resulting in lower average AUM in terms of fee generation and we focus on that.

Italy, and a very strict sort of a purposeful way as we think about managing our organization.

Our management team continues to be very very disciplined in terms of as you suggest and expense management and it's really aligning those revenues and those expenses.

We're going to continue to be I think very focus on looking at activities that frankly are not producing growth and revenue contribution for the organization. That's our main focus in terms of our expense management proposition, but wanted to make sure. We clearly are staying focused on client interest and serving our clients are very very well.

So our teams are continuing to be focused on that.

That is very important but also it's very important to highlight that we're continuing to make sure that we are absolutely investing and challenge our teams to invest where we can maintain long term growth and long term I think our revenue for the organization. So we're going to continue to be very focused on expense management or we're going to be very focused also on.

Investing in talent, where we need talent and in terms of capabilities. So that we continue to be relevant as investor interest shift and ask him about a shift in churches or desires, we're going to continue to invest in our distribution, which we have which is very important to our growth.

We're going to continue to further develop our private investment capabilities, that's very important to our growth going forward also so I really want to make sure that we highlight the growth centrex centricity, but we're going to continue to do our management team is focused on that.

In terms of expenses, we had some severance expenses in the fourth quarter around $5 million of that severance expenses.

For the year, our expenses were up around 2% year over year.

And that's obviously something that we are are very conscientious of to make sure that those expenses stay in a very reasonable level in terms of our ability to continue to invest for growth, but continue to be very focused on margins.

That helps John .

It is very helpful. Thank you and my follow up question exciting news in early Janet January about that pension joint venture can.

Can you talk about maybe how that can impact your business prospects in China. Thank you.

Yeah. So thanks for calling that out John really appreciate that we're excited about expanding our relationship with China construction Bank. As you know we've had a 17 year relationship with China, construction bank, including asset management and retail funds, so adding retirement and all four pillars by the way of the China retirement scheme is.

Is included as part of that JV as I said in the earlier comments that transaction will be accretive and we look forward to deploying resources against that opportunity and again, establishing principles positioning as being a global retirement player along with asset management. So thanks for the question.

Thanks for the answers.

Our next question comes from Jimmy <unk> with J P. Morgan. Please proceed with your question.

Hey, good morning, So first just had a question on flu.

Flows in the asset management business.

If you can talk about to.

To what extent are they being affected by the overall environment that the asset managers are facing versus maybe your performance.

Getting a little worse over the past year.

And then I had a question similarly on your outlook for flows in.

The retirement business, obviously this quarter feed retirement.

Flows were pressured because of the lapse of a large case, but what's the what's your outlook in terms of deferral rates matching contributions and just flows in that business in the current environment.

Well, it's a great question I appreciate that Jeremy and I'll have both AD and Chris respond, but before I do that just maybe at a high level.

I think what's interesting is the way we report and again that's on US on how we do this better reflects the Morningstar retail funds of which that's a minority share of overall asset management capabilities and we actually have very strong performance in particular around fixed income, which as you know is in very high demand in.

Pat will cover a lot of that and then secondly, just to note that it's you know some of the most sophisticated investors out there are actually buying third quartile performance because they have confidence in the manager and the strategies themselves and we have a very positive outlook on what's in the pipeline today and some commitments that are.

<unk> been made so I don't I I know the.

Correlation between investment performance must yield net cash flow, but I think there are instances of where you find our growth strategy is like ours may be a bit out of favor and therefore the commitments come in in spite of not having one year performance, but a reminder, our long term performance remains very strong with that I'll turn it over to Pat Yeah, Jimmy maybe just to start off.

With us for the fourth quarter fourth quarter always is challenging.

Typically that's a very challenging seasonal quarter, but it was even more challenging because of the investor sentiment that we experienced in the fourth quarter that was a sentiment of basically being risk off and positioning there.

Their portfolios with a weighting.

I was concerned concern about the fed's concern about Fatima inflation nervousness around the economic growth then and related company earnings. So this risk off sort of impact.

It was amplified, particularly in the mutual fund Investor base.

In addition to a sort of focus on accelerating there.

Holdings for tax measure reasons, which offset some of the capital gains in this period. So so we definitely saw lower sales, but also elevated withdrawals and a retail mutual fund business.

And we're not unique in the industry as a result of that.

We definitely have seen outflows in the fourth quarter. They were in equities predominantly but also in fixed income.

We also experienced in the fourth quarter, Jimmy I think a slow down.

And the real estate for the first time in terms of new investment activity, but I rest assured we have a very deep and strong pipeline of committed capital.

In real estate, but given the market conditions, we did not deploy as much of that new capital into new markets in the fourth quarter.

And just for framing airforce net cash flow for the full year.

We continue to see a very strong net cash flow picture and I think that's a better view of our net cash flow in terms of trends.

We were very pleased to see that management net cash flow for the year about $3 $9 billion, Jimmy and this is up about $1 billion from 2021, which net castle at around $2 9 billion. So we continue to see I think some strong longer term I think our expectations toward our ability to generate net cash flow.

And as he highlights beginning of the year, we definitely are change seen a change in sentiment.

Investor behaviors, becoming I think a more sort of pause or the term in terms of tone. Both on the equity particular in the fixed income markets.

And I think one area that I think we're going to be I think quite well prepared and well I think I'd be equipped in terms of the catcher med is in terms of fixed income investments in the photos towards towards that we have a great lineup of fixed income investments, but its preferred high yield emerging market debt and all of those fixed income investments are in the first quartile in terms of Morningstar.

A former China, one three and five year basis, and I think we'll continue to see flows in the AR and the real estate debt in a private credit space, where we still have I think some very strong performance. So I think as we kind of look forward in terms of 2023.

I think we're well positioned in terms of our of our ability with the investment performance that we have to continue to attract capital.

We'll probably see our real estate flows be a little bit more second half oriented because I think we need to have.

Some of the catch up evaluations.

But I would just suggest you Jimmy that performance is absolutely on our and our focus list.

But it really requires us to be more deeper when we talk about investment performance to look at the types of investments we are absolutely seeing money in motion toward and the trend relative to that it's definitely in our direction in terms of our capabilities. So very constructive and I think we have a strong all season lineup in terms of investment capability.

And look forward to capturing the shifts in investor sentiment, which is quite positive at this point.

Chris Some additional islands within RIS, yeah, great. Thanks, Yeah. Thanks for the question Jami, So I think as Dan mentioned and as we've indicated in the past the fourth quarter is a high outflow quarter for us as plans change a lot and certainly we see the opposite effect in the first quarter as sales come on.

The other thing I'd note is that when we have institutional large plans.

Close, but those can be volatile and lumpy in a quarter both on the deposit side and the withdrawal side and we certainly saw that in the fourth quarter with that single low fee large plan, which was about 3 billion in assets, none of which were managed by principal. So we definitely saw that volatility I mean, I think as we've talked about it net cash flow was one.

But we also look at the underlying fundamentals of the business and how we're doing in earning principal investment management mandates and if we look at how we're focused on profitability and driving increased revenues. We have a very good trends in earning principal managed assets throughout 2022 across all segments, we saw significant.

Fewer investment changes out of principal managed investments in the fourth quarter and we're seeing significant success, winning mandates from existing customers who came over from IRT all of which are very healthy. If we look at our historic strength in SMB for the full year I'm just looking at SMB flows net cash flow was over $2 billion for 2022. So also health.

In that core part of our market. If we look at the fundamentals I think Dan mentioned recurring deposits, where we see healthy recurring deposit trends the number of participants deferring or off the number of participants receiving a match or up the.

The average match dollars are up in the number of participants with account value are all up so healthy trends, there and specifically with respect to the first quarter again, we do see seasonality it tends to be a higher inflow quarter for us. We think that trend will continue we expect to see a positive net cash flow to the higher sales and healthy recurring dips.

Lots of trends in the first quarter. So feel overall good about the overall business give me a lot of detail. There was that helpful. It was very helpful. Thank you.

Our next.

It's coming from Sony Com market with Jefferies. Please proceed with your question.

Thanks first question just on capital as we think about 2023, I think the Ana and your comments he talked about.

Having some some prudence in terms of managing capital, but can you give us a sense of just capital return for next year, what your thoughts are there.

It maybe couch it as a percentage of earnings I know, it's all going to change under L. DTI, but maybe under the accounting accounting struck construct if you could just help us with that.

Please go ahead Sydney.

What I'd say is we plan to give more color on our twenty-three capital deployment at outlook, but I think it can go back to kind of what we've talked about you know we continue to feel that.

That 75% to 85% of net income is a really good free cash flow percentage, given our portfolio of businesses and how we think about you know very high bars relative to organic deployment of capital. We are rolling over a slightly higher excess capital as we go into <unk>.

'twenty, three and we will assess whether to deploy that as we go throughout the year as we get more clarity on the economic environment. So that's how I would think about it but again, we look forward to discussing that more in early March.

Got it okay yeah.

I did have just a one that just jumped out at me a little bit was the L. D T I disclosure.

$60 million impact is not big for the overall company, but it but I think it's a decent percentage of RIS fee are certainly larger than I thought. So maybe if you can just can you just tell us like how much of our a S V earnings come from variable annuities.

Yeah. Please yeah.

Yeah that isn't something that we disclose.

I would say is as you're aware, we have about a $9 billion in force block of VA business that business has consistently performed very well and contributed to our overall retirement franchise.

We've always manage that on a net income basis, because we knew there was some differences between the geographies of the fees on that and where the hedging gains and losses due as we went through the L. D T I process, which we've been working on for many many years.

We got a better information that allowed us to split the fees between hedging of non hedging fees and even though there's not a consistent treatment of deaths across the peers. We think this is a better alignment of those those fees as well as where those hedges hedging gains and losses go.

So again, you know we like our VA business is a key part of our retirement franchise, it's performed well given how we manage that in a very disciplined approach.

And ultimately we continue to attack.

I think that'll be a part of a contributor at our retirement franchise going forward you didn't ask it but I did want to just mention the other impacts the Val D. T. I am even though the 60 million is what we think is the enterprise impact we actually do see some other impacts to operating earnings with items such as that.

The reason that we didn't include those as they virtually offset at a enterprise level very immaterial at an enterprise level.

We do expect to see some positive impact in RIS offset by some negative impacts in individual life, but we plan to give you much more clarity on that when we recast our our fourth quarter supplement the night before our outlook call in early March Thanks for the question Sidney.

Thank you.

Yeah.

Our next question comes from Tracy Bengie with Barclays. Please proceed with your question.

Thank you.

Also have some capital question so for Cuba buybacks. He came in lower than what you've shared with us in the third quarter of that $450 million range. I mean, you did say the level of buybacks would depend on market conditions and market recovery kidney later in the quarter. So my question is should we expect a catch up in 'twenty three for coming in.

While we are annual plan of 2.53 billion for the year to shareholder.

Yeah Tracy it's a good question hopefully you can appreciate given this volatile economic environment that we're in this isn't a matter of conservatism. It's a matter of just being incredibly prudent and understanding how these businesses are going to perform but with that I'll ask Dan to provide you with additional clarity yeah. I think it's important to go back and think about the under.

Your line market conditions that underpinned, our two $5 billion to $3 billion at outlook and as we went throughout the year. Obviously, we saw equity market daily averages b, 17% lower than what would have been included in that outlook and problem and as impactful fixed income values were 18% lower.

And obviously that range of $2.5 billion to $3 billion didn't contemplate that level of macro pressures as we went through the year I actually think if you fast forward and look at our full year results 2.3 to two point relative to that two five to.

To three range and the fact that even if you just look at the excess capital in our Holdco and our life co.

[noise] was virtually $300 million at the end of the year.

Would have deployed that and again going back to Dan's comment given the volatility and the uncertainty on 2020 three.

We made the decision to be prudent we would've been at $2 6 billion I'm.

So well within that range. Despite the macro pressure that we thought soft through the year and that macro pressure is on those fee businesses that have a higher level of free capital flow.

So as we go into 2023.

We're going to continue to be prudent.

You know obviously as we thought about fourth quarter I tell our excess capital ended the year slightly higher than what we thought but there's always timing between when you put your share buyback plans in place and when you see some of that free capital slow actually materialize during the quarter and as you mentioned markets were actually.

Throughout the quarter got more positive towards the end so.

As we move into 'twenty, three and we'll talk about it more on outlook call will continue that.

If things go well there there is a a path to bringing down that level of excess capital, but our approach to capital deployment and capital management will be consistent with what you've seen throughout 2022.

Blow up Tracey.

Yeah, and just sticking with the macro and you may touch upon the Sanger twenty-three alcohol.

We enter recession this year, even the shallow.

What type of credit dressing impairment scenarios are you thinking about I remember back at the onset of the pandemic. He thought about 400 $800 million of losses that it didn't end up materializing.

Yes, Youre correct, yes, they want to frame that for us in terms of our outlook. Yeah. A couple of a couple of things I'll I'll put them in into perspective, there Tracy. The first thing I would say is our balance sheet is different than it was when we went into that.

Pandemic. So you know the first thing in size, we did reinsurer 20 to 25 billion dollar away and so just on a dollar amount perspective, the credit losses that we would see in the drift impact would be lessened relative to that I'd also say and point you to our investment portfolio that we gave a highlight of NRC.

Lives today, and if you look across.

That you can continue to see that we have a very high quality balance sheet that is also very well fit with our liabilities that we sit here today. You know we went we ended full year 'twenty two with actually positive impacts of draft and very little net income.

Our capital gains and losses, and so a very modest impact and we will give more color on the dollar amount for 2023, but as we sit here today, we do think and I'll go back to more of a normal level.

Thinking that hundred million dollar range.

But obviously very very manageable when you think about capital.

And we will continue to to make sure. We update you on that as we go forward. Thanks for the questions Tracy, we really do feel good quality of that portfolio.

Even even in a challenging time, it's it has truly been positioned to weather this sort of a.

Challenging environment. So I appreciate the question next question. Please.

Our next question comes from Erik Bass with Autonomous Research. Please proceed with your question.

Hi, Thank you. So we've seen a number of companies announced layoffs recently and it seems like more of this is coming from large employers I was hoping you could talk about what you're seeing in terms of employment trends from your clients and how this affects your outlook for both the retirement recurring deposits as well as specialty benefits premiums.

Yeah, I'll try to make a couple of high level comments, and then throw it over to Amy to provided you may have already seen Eric I picked up in the Wall Street Journal a couple of weeks ago and it was January 'twenty, six, but they've actually gone back and look back to February of 2020 and in that period of time since February of 2020, Smbs under 250 employees that actually.

Hired 367 million individuals that was net of layoffs and quits likewise on employers more than 250 employees.

Large businesses. If you will they had cut that 800000 jobs. Our focus is not on hospitality, it's not on retail it is really around the professional businesses and Amy is really truly one of our experts around the smbs. So Amy how is it impacting our business and then maybe we'll get Chris to make couple of comments on that.

Retirement side as well, yeah, so that the <unk> done a nice job Dan talking about kind of the broad macro conditions. When we look at our black and again, there's going to be no surprise in this our block is performing really well from an employment growth perspective, so what we're seeing and what we would extrapolate to kind of the larger.

<unk> business is that the sector and Dan pointed it out that really is holding up very strongly in terms of employment growth is that under 200 employees under 250 employees, we're still seeing 4.8% growth in that employment growth in that marketplace. So I think our message has been.

Small employers will keep hiring and the facts have been small employers are keeping hiring so when we look at that what I'd consider sort of heading into the mid size. It does begin to taper back just a little bit so instead of that 4.8%, we'd see something that's closer to that 443% in that let's call. It mid size 200.

2000 <unk>.

Employees once you pop above that thousand employees that is definitely where you're seeing some of the noticeable employment deterioration now I would note that does skew a little bit even towards jumbo again, our block begins to tell us less because we just don't have as much in that segment, particularly for group benefits, but.

What we're seeing is is you have are around still those mid sizes of having a thousand in 2000 employees that that impacts unemployment still are not as pronounced as the ones. We're seeing happening in that really larger jumbo marketplace very helpful. Christian anything to add on the Smbs space or I mean, I think those trends are very very similar so we.

We had good growth and momentum in that small to mid and we're watching for the larger jumbo markets as we head into 2023 very good Eric follow up.

And thank you for the color there, it's just one follow up on capital.

Your excess capital increased about 100 million quarter over quarter. Despite deploying 600 million that implies you generated about $700 million in the quarter, which I think is more than a 100% of earnings.

I was just hoping you could talk a little bit about the drivers of the capital drove capital growth this quarter.

Yeah, just a couple of comments, we do tend to see a little bit better pre.

Free cash flow toward the end of the year. Some of that is just more due to movement in some of our unregulated.

Businesses, and when we actually dividend up some of that capital.

But again, we saw a continuation of just really good trends.

With all of our business is really focused on holding the right amount of capital on only deploying capital when we can get the returns that we did and so again, obviously that's the.

The fourth quarter.

Climate did include that approximately 200 million toward M&A.

We had obviously earmark that coming into the year and then made that we're very pleased to make that deployment in fourth quarter, but there is some seasonality that makes fourth quarter a little bit higher.

Relative to free cash flow.

That's helpful error got it.

Yes. Thank you.

Thank you.

Our next comes from Alex Scott with Goldman Sachs. Please proceed with your question.

Hi, Good morning. My first question is on the net investment income and just overall sort of sensitivity to interest rates I know you all disclose some sensitivities and you know it's fairly low but you know there's sort of two components that sort of the lost earnings from a U M declining win rates.

Go up yeah, but then also the benefits that you'd get a net investment income and the two things the timing may not always match up and it struck me as a pretty strong quarter for net investment income standpoint, So I just want to understand like how we can expect that to unfold from here you know what what are the underlying elements within.

Fee and retire in the spread business in retirement that are benefiting from rates and you know towards towards degree, yes should that continue as rates remain elevated.

Solids, Deanna I'll make some comments and then see if Chris has anything to add relative to our E. S and lines of business. So first of all I think it is important to understand that that sensitivity that we gave is a trailing 12 month basis that kind of assumes the interest rate happens kind of at the beginning we see very obviously negative pre.

Sure on R. R.

Fixed income values that impacts our revenue in both our I S. M. Pgi and you kind of see that continue and then as you start to invest some new money see some cash yields go up and you'll see that the benefits start to offset that to then get to a pretty muted overall impact in the trailing 12 months and so again you did see that.

Transpire in the fourth quarter I do think it's important when you look at our total company net investment income and compare it to last quarter, there's kind of two dynamics I want to point out one dynamic is obviously variable investment income was not as negative in the fourth quarter as it was in the third quarter and then you also because of equity.

<unk> accounting for our Brazil joint venture and the strong earnings that we saw in Brazil.

Partially due to inflation.

Flowing through that line of business as well so you need to kind of take that part out and then what you're getting to is you are starting to see some impact from the higher interest rates, you'll see that our new money that we're investing in is earning a higher rate. We're also because of increase in treasury rates youre going to see that what we're earning on cash.

What we're earning on escrow and Pgi is seeing some benefit.

From that I do think it's important to point out, especially in RIS that some of that increase you see a net investment income then gets credited back out to our customers.

And our B C N S line, and so that it doesn't fall to the bottom line.

As you think about that but specifically to the bank and trust business and our I S. I think those are the businesses that are benefiting from those higher levels of interest rates, but I'll see if Chris has anything to add there no I think you captured it well I mean, we certainly are seeing.

I think the thing that step back as we do look at Rds as a as a single business fee and spread together, particularly post IRT in the lines are blurring between fee and spread and so we get the diversification benefit by managing those businesses together the resilience of the spread businesses win with really compelling returns and the lift that you get some short term interest.

Rates helps offset the pressure that we see from down equity markets. So we definitely saw some some rising short term rates are in fee. We saw rising rates, we saw growth in our routine business and higher investment yields are in spread and some of the net revenue beat was really largely macro driven which is.

Really strong equity performance during the quarter, we opened a close was up about 7%, which helped drive overall separate account returns. So I think that's an explanation for the quarter very helpful. Alex follow up.

Yeah that was very helpful. Thank you a follow up I had just to go back to variable annuities for a second make sure I understand so when when you all took a portion of the fees and moving below the line and considering the costs associated with some of those writers and hedging.

Yeah could you unpack.

How you did that in terms of you know ROE is it relative to attributed fees that under L. D. T. I see your sort of you know including enough fees below the line to cover the attributed fees at this point or is there anything about the dynamic there it'll be below the line that I should be thinking about particularly as it relates to.

The attributed fees and how those compare to the actual fees that are being put forward one.

Yeah, Alex that's exactly what you talked about as we went through the process of L. D. T. I it actually allowed us to attribute the fees to how much is coming relative to the hedging cost out of the of how we manage that business and how much of the fees or other fees you know more relative to the the non hedge.

Gene aspects of that product and so again that dollar amount that we charge our customers for for those hedging costs will move down below the line those are pretty stable quarter to quarter and they will then more offsets the hedging gains and losses that I always have shown up.

So the line in our realized capital gains and losses. So it's exactly what you talked about it had nothing to do with market value adjustments or any of those types of things that also could have arisen out of Val DTI really ours was really just that geography and attributed fees.

Got it okay. Thank you.

Hum.

Our next question comes from Ryan Krueger with Keyw. Please proceed with your question.

Hi, Good morning, I had a question on.

Martin consolidated G&A expenses, given that you took action and didn't have the normal higher seasonal <unk> expenses I guess my question is.

As we look forward into 'twenty three.

Like should we actually expect expenses to come down from the fourth quarter run rate given that there are.

I can still some seasonal things that impacted the fourth quarter or.

Is that correct.

I'll, let level to just thinking about going forward.

Yes, Dan will handle it but I would just simply say this we are going to continue as I said earlier to align our expenses with our revenues and we don't have a crystal ball on what a full 23 looks like except to say, we're going to be incredibly disciplined and always look to be opportunistic about taking out expenses, while at the same time, making sure we don't.

Starve the businesses and invest for growth, maybe Dan we would like to add some additional color. Yeah. A couple of things that I'll say there you know we did say in our prepared remarks that we had about $15 million of severance and restructuring costs in the quarter. We did not identify that as a significant variance partially because we saw again as you mentioned.

Our our normal fourth quarter seasonality of expenses did not materialize and so even with those severance cost in there our overall fourth quarter expenses.

Actually we're very aligned with what we wanted them to be we have severance in every corner, but obviously it was a little bit more elevated as we go in.

We went into the fourth quarter as I think about 2023, you know you have a lot of moving parts right. One moving part is some of our incentive compensation kind of resets.

And ultimately that could have an increase in some of our expenses as we go into 'twenty two 'twenty three but having said that we're going to continue to focus on all of our expense experts across the enterprise. We you have highlighted kind of the alignment with revenue given macro but as you're also aware we continue to make very.

Good progress on the realization of our synergies and the IRS business as well as trying to manage through the stranded costs that came out of us exiting our retail fixed annuity and our U L. G lines of business and both of those were actually in line to slightly ahead of where we thought we would be at this point and then we again have added in the effort.

To also make sure we're aligning with the macro pressures, while continuing to make the right investments to drive long term growth and so on.

It's really hard to say, where macros is going to be as we go in we've obviously had a really good start to January I think all we know is that we think there'll be continued volatility.

And we're going to continue to do what we've done in any period of volatility and pressure is to make sure. We align that expenses with revenue, whereas if you look at both fourth quarter and full year you can see our change in comp. Another is very aligned with our change in net revenue, which I think is testament to that alignment okay that helps.

Dan.

Thanks follow up was on the investment portfolio I. Appreciate all the detailed update that you provided and I guess just on.

Commercial mortgage loans that the LTV looks continues to look very favorable can you give any color to fund to what extent you you've attempted to I guess.

Re appraised the portfolio and reflect potential.

Downside the property value, maybe particularly in an office.

Yeah, we look at that constantly and again credit goes to pad his team Todd ever it for having really put together, a very competitive and high quality commercial portfolio or add additional color yeah, Ryan great great sort of follow up question I think from a bottom up perspective, we are absolutely always and.

<unk>, our commercial mortgage portfolio and in our fixed income portfolio to make sure that we really understand what the macroeconomic environment is doing to each one of our investments. So we have a very disciplined bottom up perspective to both our fixed income in our commercial mortgage portfolio relative.

Relative to its position and resilience to what we believe would be a recession environment for 2023.

But we also do a top down sort of model sort of stress analysis of our portfolio and on both sides of the analysis, both the bottom up in the top down our commercial mortgage portfolio continues to hold up very very well Ryan.

And you you highlighted some of the material that we already provided but we continue to see very strong resilience in terms of the income durability.

The investments we have in commercial mortgages. The area that you would imagine we take extra extreme sort of I think vigilance on right. Now is our office portfolio. We have about 100 loans for about $3 $5 billion in our office portfolio, but even there. There is we do our sort of bottom up and a top down analysis for office portfolio has a 52%.

The value that's Coors coverage of about $2 seven times, it's 90% occupied that continues to hold up quite well, but as you can imagine we're doing again a lot of bottom up on scenario analysis on tenant rollover. These maturities how much some of the properties are getting back space to the markets.

And that will continue to be a very strong vigilance for us as we go into 2023, but we're not seeing any sort of major problems surface yet in terms of our overall portfolio or in that office part of our portfolio Ryan.

Thanks Pat.

Thank you.

Thank you I appreciate the question.

Okay.

Our next question comes from Josh Shanker with Bank of America. Please proceed with your question.

Yeah. Thank you very much.

Just following up a little bit on Jimmy's question, I I understand that a lot of the assets in the portfolio, our institutional and not read by Morningstar, but you've probably done a lot of work on the retail side can you talk about.

How quickly.

From the moment you get great Morningstar results, you see funds flow in and to the extent when the results aren't as strong a retail funds flow out.

I wish it were easier than it is because as mentioned Josh.

Josh we we actually have some third third quartile performance that's seen large net cash flow in new sales a lot of attention. So the correlation sometimes is very difficult you'd think they'd be highly correlated but the reality is they're not necessarily correlated. It a lot has to do with its whats in favor at any given time, but Pat you can clean that up for me.

Yeah, Josh you know clearly you know Morningstar benchmarking is utilized to inform advisers gatekeepers individuals.

Oh, Wow, Okay, our capabilities and our strategy of joint relative to other investment managers.

But it's more a.

Complicated that because decision makers gatekeepers are really looking at not just one year performance looking at three year five year since inception performance. They're also looking at things such as the Investor style.

The approach they take in terms of their actual.

Investment portfolio pricing in the portfolios.

Terms of portfolio construction, there's a lot of other things that are multi strategy solution providers look at outside of performance in terms of diversification to the overall mix of performance. So it's much more nuanced in terms of just our performance relative to the.

The the movement of capital toward a capability or away from a capability and as Dan mentioned, there really is no sort of direct correlation between a timeframe as to when a morningstar rating is X versus Y in terms of the net cash flow.

It's it's informative for us to have that because it's a very important in the eyes of our advisors to continue to evaluate our sort of our.

Capabilities, but it doesn't have a direct correlation as you suggest.

It's quite long Josh Yeah, yeah on the institutional fixed side.

Are you seeing any changes in the strategies that you're winning mandates for given views about recession or given views about inflation or whatnot has have the styles that you engage in change on the fixed side.

Yeah, it's really a great sort of follow up to you know were seen on the fixed income side. Some real strong interest, particularly right now out of blocks and try and transfer and high yield.

We're seeing also a pay that again toward the emerging market debt space.

And we continue to see a private debt private credit interest from institutional investors. So.

Institutional investors are engaged.

In fixed income in a very clear purposeful way right now and I think we'll continue to see very long term trends from institution investors towards alternative investment classes, including real estate and including the debt capabilities into private space.

Thank you very much.

Thanks, Josh.

And we have reached the end of our Q&A.

Mr. Houston Your closing comments please.

Yeah. Thanks for joining the call today and again apologies for those in the queue that we did not have a chance to get to Humphrey and his team will follow up accordingly from our perspective 2022 was a transformative year, we derisked our portfolio reduced the balance sheet and our businesses are less capital intensive they've been historically will continue to focus.

On investing in our growth drivers managing our expenses and revenues and returning excess capital to shareholders, we'll share more about our 2023 outlook and long term guidance on March the second outlook call. Thank you for taking time out of your valuable a day too to be part of this Q&A. Thanks, so much.

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 12 o'clock P. M. Eastern time until end of day March 23rd 2023.

13735 to one six is the access code for the replay.

The number to doubt with the replay is 8776606853 for U S and Canadian callers or to 0161 to 7415 for international callers.

Yeah.

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Uh huh.

Yeah.