Q1 2023 Principal Financial Group Inc Earnings Call
[music].
Good morning, and welcome to the principal financial Group first quarter 2023 financial results Conference call.
There will be a question and answer period. After the speakers have completed their prepared remarks.
If you would like to ask a question at that time simply press star and the number one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
We would ask that you'd be respectful of others and limit your questions to one and a follow up so we can get to everyone in the queue.
I would now like to turn the conference call over to Humphrey Lee Vice President of Investor Relations.
Thank you and good morning, welcome to principal financial group's first quarter 2023 conference call.
Always materials related to today's call are available on our website at investors stopped principal dot com.
Addition to our earnings call materials. We included additional details of our commercial real estate exposure in our slide presentation.
As a reminder, financial results are now reported under the long duration targeted improvements accounting guidance or L. DTI historical results have been recast and are also available on our website.
Following a reading of our safe Harbor provision CEO , Dan Houston and.
CFO Deanna Strabo will deliver some prepared remarks, we will then open up the call for questions.
Others available for Q&A include Chris Littlefield retirement and income solutions.
Also asset management, and Amy factory benefits and protection.
Some of the comments made during this conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act. The company does not revise or update them to reflect new information subsequent events or changes in strategy.
Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K filed by the company with the U S 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.
Morning, I'll share highlights of our financial results and key performance highlights for the quarter the.
Deanna will follow with additional details on our first quarter results, our current financial and capital position as well as some details on our investment portfolio.
Our integrated business model remains resilient during periods of macroeconomic volatility.
As shown on our strong first quarter results, while we're not immune to credit and market pressures, we are well positioned for a variety of economic conditions.
Starting on slide three we reported $367 million of non-GAAP operating earnings are $1.48 per diluted share in the first quarter.
We returned more than $300 million of capital to shareholders during the quarter through share repurchase and common stock dividends.
We're delivering on our capital deployment strategy by investing for growth in our business and returning excess capital to shareholders.
We ended the quarter with $660 billion of total company managed AUM, an increase of 4% from year end 2022, reflecting favorable equity and fixed income markets.
Net cash flow as well as positive impacts from foreign currency.
We generated $600 million of positive total company net cash flow a strong resolve during a period of outflows across much of the industry.
This highlights one of the benefits of having a diversified and integrated business model across asset management retirement and benefits and protection.
Turning to investment performance on slide four market volatility is underscoring the value of our diversified offering our fixed income strategies are delivering strong results managing through a challenging credit environment.
While our asset allocation in U S equity strategies have been impacted and their short term performance our international equity strategies are delivering strong alpha so far this year boosting one year performance our approach to invest in high quality high growth companies continues to resonate with our clients winning additional mandates. We have also received goal.
And silver ratings from Morningstar for several of our key equity funds turning to slide five I'd like to spend a moment on our investment portfolio. As there has recently been increased market focus on credit and commercial real estate exposures, we're confident in our high quality diversified investment portfolio, which is well aligned with our liability profile.
We actively manage our investment risk and had been intentional about further improving credit quality of our portfolio since the global financial crisis.
The reinsurance transaction, we completed in 2022 decreased our general account by 25% this reduce our credit exposure and lowered our investment asset leverage well below the industry average.
We're a global real estate leader with more than seven decades of experience managing nearly $100 billion of assets, including more than $70 billion for third parties. Today, we have over 300 real estate investment professionals 55 of which have more than three decades of real estate experience through many different market cycles over.
In the last decade, we have reduced office exposure in our commercial mortgage portfolio as we saw signs of stress coming in this segment, a move which has proven to be appropriate as the recent stress on the banking sector has raised financing concern for office properties in particular.
We've also enhanced our underwriting standards since the global financial crisis, producing a high quality portfolio with substantial cushion to withstand severe downturns.
Our investment and risk management teams have been diligent in transforming the portfolio delivering a track record of strong financial performance and positioning us to weather a variety of economic conditions and market cycles.
Turning to our growth drivers and some additional highlights for the quarter, we continued to benefit from strong employment and wage growth and U S, particularly in the small to mid size segment with our retirement benefits and protection business.
In retirement, we generated strong sales across all segments gross and net participant activity and positive net cash flow with reoccurring deposits up 11% on a trailing 12 month basis.
While large market sales and lapses can fluctuate quarter to quarter, we have good momentum and our pipeline is strong for the rest of the year.
Our SMB segment is holding up very well with strong reoccurring deposit growth and low contract lapses contributing to a 33% increase in net cash flow compared to the first quarter of 2022 and in benefits and protection our focus on the durable small to mid size business market continues to drive growth over the last 12 month.
The small to midsize employer market has experienced record sales strong retention and demonstrated continued strong employment growth all of which are contributing to our above industry growth in premium and fees for specialty benefits.
In asset management, our broad distribution and geographic footprint continues to produce benefits Pgi managed net cash flow was a positive $400 million in the first quarter.
While flows for many active managers were negative in the quarter, we continued to benefit from our integrated business model and differentiated investment capabilities, including hybrid target date stable value and guaranteed income products, we are winning business from both new and existing retirement customers, while generating flows from our general account as.
We look forward, we continue to see active engagement with global institutional clients involving investment strategies in private debt and credit specialized investment income capabilities and opportunistic investing in real estate.
We also drove strong quarterly net cash flow of $800 million in principal International. These flows were well diversified across southeast Asia, Brazil, Mexico, and Hong Kong as we continue to execute on our strategy building upon our market leadership and key joint venture relationships specific to Brazil, we remain a mall.
Leader and pension num deposits as well as net cash flow Bob.
Bottom line, we are very excited about the growth opportunities, which lie ahead and I'm confident we have the right product mix the right market focus and the right distribution channels to drive value for our customers and our shareholders Deanna.
Thanks, Dan Good morning to everyone on the call. This morning, I will share key contributors to financial performance for the quarter, an update on our current financial and capital position and details of our investment portfolio.
Reported net income attributable to principal was a negative $140 million in the first quarter. Excluding the loss from exited businesses net income was a positive $347 million with $11 million of credit losses credit draft was slightly positive in the quarter.
Excluding significant variances first quarter non-GAAP operating earnings were $395 million or $1 60 per diluted share a strong result, despite macroeconomic pressures on AUM levels during 2022.
As Dan noted first quarter results highlight the value of focus and the strength and resiliency of our diversified business strategy.
As detailed on slide 17 significant variances had a net negative impact on our first quarter non-GAAP operating earnings of approximately $33 million pretax $29 million after tax and 12 cents per diluted share.
The significant variances were primarily due to lower than expected variable investment income and our yes, and benefits and protection mortality experience true ups in our I S were mostly offset by L. D T I model refinements and specialty benefits.
As discussed during our 2023 outlook call, we expected variable investment income from alternative investment returns and real estate sales and prepayment fees to be lower than 'twenty, 'twenty, two levels and lower than our expected long term run rate due to macro environment heading into the year.
VII was positive in total for the quarter, but we did not have any VIII from prepayment fees are real estate sales.
Macroeconomic volatility continued in the first quarter and pressured earnings in our fee based businesses relative to a year ago corner, while the S&P 500 daily average increased 4% from the fourth quarter of 2022, it was 11% lower than the first quarter of 2022 and 10% lower on a trailing 12 month basis.
Yes.
Foreign exchange rates were a tailwind compared to the fourth quarter, but a headwind relative to the year ago quarter and on a trailing 12 month basis impacts to reported pre tax operating earnings included a positive $7 million compared to fourth quarter of 2022.
Right now you're going to have compared to first quarter 2022 and a negative $17 million on a trailing 12 month basis.
Turning to the business units. The following comments on our first quarter results exclude significant variances as a reminder, comparisons to first quarter of 2022 are impacted by the reinsurance transactions that closed in the second quarter of 2022.
Revenue growth and margins in specialty benefits and principal international were in line with our expectations in the first quarter.
Revenue growth in our E. S. N P. G. I were pressured by the impacts of macroeconomic volatility and lower account values in a O M compared to a year ago, but both businesses are benefiting from more favorable conditions relative to the assumptions and our 2023 outlook.
Despite the pressures on revenue growth the margin and I asked was strong in the first quarter and benefited from diligent expense management, one time items in the quarter and timing of expenses.
For the full year, we continue to expect to be within the 35% to 39% guided range was the ultimate level impacted by macro conditions for the remainder of the year.
P. G is margin and pre tax operating earnings were pressured by expected expense seasonality as well as expected lower transaction and borrower fees.
Expenses in the first quarter were elevated by approximately $20 million due to seasonality of payroll taxes and deferred compensation. We continue to expect P. G is margin to be within the 34% to 37% guided range for the full year.
Principal International had strong earnings in the first quarter driven by growth across the business and higher AUM.
The impacts of inflation and higher interest rates in Brazil were offset by lower than expected and call Hey performance N V II in Chile.
In life pretax operating earnings and margin were lower than expected, primarily due to higher claims experience in the quarter. The decline in premium and fees was driven by the 2022 reinsurance transaction and will normalize throughout the year.
We continue to expect to deliver on our 2023 guidance for the full year, both at the business unit level as well as for the total company.
Turning to capital and liquidity, we remain in a strong financial position. Despite the volatile environment. We ended the first quarter with $1.8 billion of excess and available capital, including more than $1.5 billion at the holding company. This includes our $800 million target and 700.
The proceeds from debt issuance in the first quarter that is earmarked for that maturity and redemption in the second quarter three.
$300 million in our subsidiaries and $30 million in excess of our targeted 400% risk based capital ratio.
During the quarter. In addition to returning excess capital to shareholders, we accelerated our organic capital deployment as we saw attractive return opportunities in our businesses.
This was a pull forward of our business plan for 2023 Lucky.
Looking ahead, our free capital flow generation will increase throughout the year.
We returned $306 million to shareholders in the first quarter, including a $150 million of share repurchases and $156 million of common stock dividends last night.
We announced a 64 common stock dividend payable in the second 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'll continue pursuing a balanced and disciplined approach to capital deployment.
I want to end my comments by providing some additional details of our investment portfolio, including our real estate exposure.
As Dan mentioned, we have intentionally improve the overall credit quality across our fixed maturity and real estate portfolios since the global financial crisis.
Our investments are high quality, well aligned with our liability profile and we are well positioned for a variety of economic conditions start.
Starting on slide 11 specific to the real estate portfolio as of the end of the first quarter. Our commercial loan portfolio has a current average loan to value of 46% and a debt service coverage of two and a half times. This is improved from 62% and one eight times in 2008.
We have minimal exposure to floating rate loans, and a very manageable maturity schedule of high quality loans with only 4% maturing in 2023 and another 7% in 'twenty 'twenty four.
Our commercial office portfolio is geographically diverse and high quality, we saw signs of stress building in this sector and proactively reduced our office exposure from 37% of our mortgage portfolio in 2016 down to 25% today.
We have taken a conservative approach with our office portfolio and have manageable near term maturities.
We have already reduced valuations in our office portfolio by 22% from the peak and they are 20% below the current implied index value.
The current loan to value on our office portfolio is 52% and debt service coverage is two and a half times.
We have looked at a number of different stress scenarios on office valuation. This includes an additional 20% to 40% decrease from our current conservative valuations and assumes an immediate default of all office loans over 100% LTV the ultimate impact to our RBC ratio is estimated to be.
Two to three percentage points under the 20% additional decrease scenario and 10 to 12 percentage points under the 40% additional decrease scenario both very manageable.
That said, we have the experience and a long established track record of navigating real estate cycles. It will take time for any market cycle to emerge and the impacts would play out over a number of years.
Looking at our C. MBS portfolio relative to 2008, we have decreased the overall size of our portfolio by 22% and improve their quality to 98% within NTIC one rating today.
Our equity real estate portfolio is well diversified with a high concentration of property types with strong fundamentals, such as industrials and life Sciences.
The market value of our portfolio is substantially higher than our carrying value.
Overall, we are confident in the quality of our real estate portfolio remained diligent in monitoring and proactive and servicing it we have built a high quality portfolio that is well diversified and a good fit for our liability profile.
2023 will not be without its challenges, but we are positioned to focus 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.
We have the financial flexibility disciplined and a track record of managing through times of macro volatility and uncertainty.
This concludes our prepared remarks, operator, please open the call for questions.
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.
The first question comes from Ryan Krueger with K B W. Please proceed with your question.
Hi, Thanks, good morning.
First question was just on the office stress scenario that you provided.
Just curious in a.
Pretty severe scenario in a pretty limited RBC impact was that just based on the impact of downward ratings migration and some level of credit losses or did you assume anything for the impact of that you'd have to take over some of the properties and they would get the higher capital charge from being a known to real estate property.
Yeah. Good morning, I appreciate that question Ryan I'll have deanna handle that yeah. It was it was us taking over those properties and in a complete default obviously the extreme one.
Was very unlikely 40% additional decrease from our already reduced 22% values and then I also think it's important that that would not happen at one time and what happen over an extended period of time.
Got it thanks, and then could you talk about.
I guess the amount of committed capital you already have to deploy into real estate within pgi overtime as well as your evolving thoughts on when when the market may pick up for new deployment opportunities.
That's great question really appreciate that Ryan a path can you help us out on that one yes. So thanks. Thanks for the question Ryan.
I think as as you know we have been a very strong and very active advisor to investors throughout the world and in real estate and we do have a very strong committed but unfunded pipeline through those conversations with clients throughout the world.
As you can imagine we have not deployed that pipeline, that's sort of dry powder into the marketplace until we believe that valuations have gotten to a point, where we believe we can start to enter into new markets again, but that pipeline is over $7 billion today and unfunded committed capital both in the debt and in the equity.
Strategies, so at the right time at the right appropriate time, we will deploy that.
To your second question the timing will be I think dependent again once we see valuations are at a place. We think are desirable for us to engage that probably is going to be later. This year. We believe it's going to have a transmission spectrum next two quarters, yet to get valuations to a place where we think we can start to enter with any sort of strong <unk>.
<unk>, but.
But we will and have a desire to get back in the markets. When we think it's appropriate one other thing DISA mentioned right I just was in Asia, three weeks ago and not only in terms of the additional sort of funds we have today, but the active interest from institutional investors to eventually take advantage of the opportunity in real estate.
Is quite pronounced.
We're having some new an active conversation when should investors in many parts of the world to raise money, particularly in private debt right now because I think that's the first place of entry point, but also in terms of private equity as we go into 2024 over that helps right.
Great. Thanks, a lot.
Okay.
Our next question comes from the line of Jimmy Buehler with J P. Morgan. Please proceed with your question.
Hey, good morning, so the first one.
Is just on the feed retirement business and if I look at the flaws in the <unk>. Even if you include the spread retirement the flow seem pretty light.
Relative to what you've had in the previous one Qs over the last several years, especially.
Especially given the fact that the labor markets as strong as it is so if you could just give some color on what drove that.
Chris Please.
Sure. Thanks for the question Jimmy Yeah I.
I think when we looked at flows in the first quarter I'd comment on a few different things. We certainly are seeing lumpiness in large market.
And we have one slow fee plan.
That lapsed in the quarter that was about $2 8 billion in assets. Despite that one lapse. We are seeing really strong pipeline and large and a reminder, that the large or you're going to see lumpiness. Both on the flows in as well as flows out when that happens since there they're larger plans.
When I think about transfer deposit performance, though up 22%, we got really strong momentum in our business and a really strong pipeline. The underlying fundamentals are strong as well I think Dan mentioned in his comments, particularly in the SMB and so while when you look at recurring deposits growing at about 4% versus.
As year ago, and 11% on a trailing 12 month basis, it's particularly strong in the SMB space. Those recurring deposits were up sort of an 8% to 9% and our net cash flow in F&B alone was nearly $2 billion in the quarter. So we're seeing really strong performance there, but again it.
Can take away from some of the Lumpiness youre going to see on flows when you have one large plant.
Plant one large plant that can mask, a really strong quarter do you have a follow up Jimmy Yeah. Just it was on Pgi margins as we think about as we think about margins for the rest of the year is that <unk> a good number to use going forward in terms of expenses and just overall margin levels and pgi.
Yeah. So thanks, thanks for the question Jimmy.
As you know at the margin for the first quarter was a little over 30% that should not be a good reflection of where we see the rest of the year in terms of margins. We did have as you recall every year, we have a sort of one time expense adjustment.
Associated with.
Retirement deferred compensation and also payroll taxes that is a onetime first quarter that was around $20 million. So that's one thing just to highlight Jimmy in terms of that margin discussion. The second thing is we do think and have seen our first quarter sort of a reset in terms of some valuation is starting to increase.
And that's going to allow for a little bit larger AUN base going forward along with the growth that we continue to expect in the AR and the platforms, we have and so our guidance of 34 to 37 that we we presented to you in the call are we remain very confident that we will achieve that 34 to 37.
Sent by the end of the year Jimmy.
Thank you.
Thanks for the question.
Our next question comes from the line of John Barnidge with Piper Sandler. Please proceed with your question.
Good morning, and thank you very much for the opportunity.
Oftentimes you talk about employee withholding match and the trends there.
How has that trended versus last year are you seen employees or employers pull back at all on how.
They are contributing and how does that factor into the recurring deposit growth within RIS. Thank you.
Yeah. It's a great question. The one thing it's amazing as just our.
Competitive that SMB marketplace still is in terms of attracting and retaining talent those things to remain strong, but Chris you want to provide some additional detail on the strength of the of the matching contributions yeah sure I would say, we still see growth. Although it is certainly slowing from what we saw in 2022, so John when I when I look at the <unk>.
<unk> of participants deferring the numbers receiving a match the new participants with account value and the overall average of deferred dollars per participant all of those metrics are up 3% to 4% year over year and again as I highlighted in the SMB, it's particularly strong at 8%, 9% on recurring deposits. So that is all that.
It's all positive, albeit a bit slower than we've seen in past years.
Thank you and my follow up question.
Maybe just a clarifying on the $1 8 billion on slide three of the presentation. There is a footnote and you talked about it in your prepared remarks about the 700 million and proceeds are we supposed to normalize for that or is the $1 8 billion. The number we should be using thank you.
Anna Please yes, thanks, John for the question Hope you recovery is going well after your accident just a couple of things there that one eight that you see on the slide is elevated due to the $700 million of debt issuance that we issued in the first quarter, but we will pay off the corresponding existing debt and.
The second quarter, so our pro forma would be more like the $1 1 billion.
Your follow up is then why did that go down from where we were at the four at the end of the year and so just a couple of comments on that you know really the two things that are going to impact that rolls forward other than that issuance of debt I. Just referred to is one the return of capital to our shareholders and to any free cash flow and <unk>.
Dividends between entities during the quarter. So obviously you saw during the first quarter. We continued to return a sizeable amount to our shareholders of over $300 million.
It's $150 million of share buybacks, and a slightly larger amount to our common stock dividend them on free cash flow and dividends first quarter is always seasonally light.
It's really kind of two primary drivers there we build up and then Theres just seasonality and the timing of a dividend and then also in the first quarter you have all the cash payments of bonuses.
That also pressures first quarter as well if you go back to 'twenty, two and look at the roll forward from fourth quarter of 'twenty, one to first quarter of 'twenty, two youre going to see that.
A very similar path.
Pattern excuse me.
Pointed to minimal free cash flow in the first quarter, but.
I'll ask, albeit very strong free cash flow for the full year and beyond that fourth quarter is always our largest quarter for free cash flow as you heard me mention in our prepared remarks, one thing that was a little different this quarter versus first quarter of last year is we did see a higher volume of high.
Our return organic deployment opportunities in the quarter and accelerated at a portion of our full year sales plan, we're not changing our full year sales expectation and so again, it's just a shifting them from future quarters into the current quarter and we actually then we'll see higher than originally anticipated free cash flow in the us.
Other quarters. The one I would point to that is most obvious is PRT, we had nearly 600 million of sales in the quarter and first quarter is typically a very very light quarter. So I think bottom line. The seasonality. We saw was not unexpected we've seen it in prior years, we will continue to see it in future years and we remain.
Confident about our free cash flow opportunities for the entire year.
Thanks, John for the question.
Okay.
Our next question comes from the line of Tresiba in G. G with Barclays. Please proceed with your question.
I'd like to touch upon the specialty group benefits can you add color regarding what's your old higher loss ratios across several products like dental and vision group life individual disability.
And will that accordingly, Amy please yeah sure. So so I think I would settle in on saying we were we were generally feeling good about the loss ratio is seeing there within the ranges that we would have expected and dental is probably the one that I would highlight there does have a bit of seasonality in it.
As you know and as we've discussed on a lot of private call previous calls the dental loss ratios really got out of track in terms of seasonality with COVID-19. So with some of the closures and other things that happened, we sort of lost our ability to see that seasonality in the industry for a couple of years, what I see in dental.
Seasonality is it's returning back to pre COVID-19 levels. So when I look at how dental utilization emerges over the year. It's typically the highest in first quarter. So what I would say is that loss ratio that we're seeing for dental is seasonal it's back to expected patterns and it's still within what we would expect to.
See our full year ranges for some of the loss ratios that we're seeing across our group benefits and IDI block are within normal levels and Tracy you also mentioned group life.
I'm actually a group life is is down once you adjust first quarter of 'twenty two for the Covid claims it is up from fourth quarter, but it was more because we had a abnormally low loss ratio in the fourth quarter of 'twenty. Two so I guess you had mentioned group lifestyle just wanted to touch on that one as well.
Okay excellent just.
Circling back on the comments about adjusting your available in excess.
Cash so if I take out the 700 million from near 1.5 billion of Holdco cash you're exactly at the 800 million minimum threshold and then when I'm thinking about it there isn't a lot of excess capital from your subsidiaries 300 million or so.
You sound confident about meeting your 75% to 85% free cash flow conversion.
Are you expecting greater organic.
Todd.
Yeah surplus generation through earnings and that's how you'll get there for the remainder of the year.
Yeah, so as you're aware our free cash flow is all driven by statutory results as well as again, an N and non life entities that would be the the movement of that excess cash and capital up to the holding company. We are confident on that as mentioned the seasonality and some of the just the pressure.
Of of dividends and the fact that we dividend a high amount in the fourth quarter. So you you start the year at a smaller level in those subsidiaries them, we feel very confident relative to that don't see any.
Meaningful disruption to our capital plans in the in the current environment and the other thing I'd bring you back to is you know post.
Post the transactions last year, our risk profile of our business mix.
Is is is lower our credit risk is lower we've talked a lot in giving you a lot of material Oh, why we feel really good about the high quality.
Of our investment performance, our portfolio that will perform well.
And so again you know when you bring that all together, we will see higher dividends and into Q3, Q and fourth Q and we also do see that seasonality and in statutory results as we go throughout the year.
Okay that helps Tracy.
Our next question comes from the line of Wes Carmichael with Wells Fargo. Please proceed with your question.
Hey, good morning, Thanks for taking my question I kind of wanted to stick with free cash flow for a second to but on slide two of the deck. It mentions that you expect free cash flow conversion to increase throughout the year, but my understanding is that ratios on the net income excluding the exited business. So if I looked at the first quarter, the 300 million returned to share.
The holders I calculated a ratio of 86%. So it seems like youre kind of there already in the first quarter. So I'm just trying to reconcile that with your thoughts on that should accelerate.
I'll have Dan handle that but west welcome and I appreciate you picking up coverage on PFG.
Wes just so you're aware that deployment can come out of two places it can come from excess you had coming into the quarter as well as the free cash flow generation during the quarter and we came in right at about I think it was just shy of $300 million of access coming into the year in our Holdco and and then the entities and.
So again, you need to factor that into that result, as well.
Yeah.
Got it and can you maybe just talk about your outlook for for 2023 for pension risk transfer sales you had 600 million in the first quarter in RIS, but it seems like it might be a pretty good environment with higher interest rates and as well as the tailwind from the equity market is bouncing back.
True to that Chris you want to go ahead and respond yeah I'll welcome Ross. Thanks for the question Yeah, I mean, as Deanna mentioned, we had a very strong start to the year.
Which was a little unusual for first quarter.
We do expect to you know grow.
Crowe, our PRT business call it 10% to 15% over year over last year. So in that 2.3 ish billion dollar range is kind of what we're shooting for the industry is expecting opportunities of the $30 billion to $40 billion range overall and plans are still really well funded according to Mercer at 102%. So we do see a lot of opportunities for PRT.
I think the most important thing for us, though as we deploy that capital in a disciplined way and so we're not going after every PRT opportunity were going for those where we can get a good return on the capital that we're.
Investing in that business, it's also probably worth calling out west at about 25% of those PRT sales actually came from existing full service customers and again that comprehensive approach to retirement solutions is what we're about and you can see where those intersections come together and help drive results for the for the organization and to that point then about 100.
$50 million of the 600 in this quarter were existing DB customers of ours. So you do see the power of that in our business.
Thanks for the questions.
Yeah.
Our next question comes from the line of Michael Ward with Citi. Please proceed with your question.
Hi, Thanks, guys.
Good morning I.
I really appreciate the disclosures on CRE very helpful.
I think you guys mentioned that the Ltvs are revalued quarterly.
So I was just curious about the debt service coverage component and how current these metrics are in.
Just trying to figure out mechanically not not necessarily just for principal but for CRE debt like this how might this evolve over time, and how sort of current or the debt service coverage metrics that we see.
I appreciate that Michael and patent also might be helpful. Just to maybe share a little bit with the group about the resources. We have surrounding this in terms of valuations and feet on the.
<unk> two to assess this.
This asset class Thanks, Michael for the question.
One of the sort of the benefits that we have as an organization as Dan highlighted in his prepared remarks towards the size of our organization. So on the office component, which I know is very important to all on the line here, but.
But we also do is for the broader portfolio, but office, where actually we reevaluated re underwriting each one of those loans every quarter.
So we have a very deep wide experienced team that covers 40 of the major markets in the U S and we have underwriters, who are steepened knowledge steeped in those markets to do basically quarterly revaluations reconstructing the cash flows.
Associated with the rental streams and lease structure of those transactions real time, along with getting market data on where cap rates, maybe where there may be heading what what's going on in terms of market rents relative to the contract rents and in our sort of property tenancy changes and really updating on a cash flow basis each.
And are those assets from a property income expense perspective. So we are actually doing a very deep cash flow analysis, which allows us to have a lot of confidence in those debt service coverage ratios.
As a result of that in terms of announced with Michael and then in terms of valuations. Obviously, we also have a very deep experienced equity real estate group, which is developing and managing real estate throughout the country. So they're getting real time broker opinions as to the trends that are going on in terms of cap rates trends that are going on in terms of.
Investor sentiment and so it's a very robust process that we're engineering every quarter now for office portfolio and then on the residential and industrial portfolios also we're going through that same process over a sequence of quarters.
I know Michael Thank you Pat.
Yes.
That's very helpful guys.
Thank you so maybe on commercial mortgage loans versus C. M. B S. I'm just wondering if you could comment I think you guys are mainly are almost all conduit.
And I believe about 30% of that is office. So hoping you could comment on that and whether or not that's included in the RBC stress test.
Please yeah. So so we do have enel.
The analysis that goes on relative to our C. N. B S portfolio also an interesting to note that our sort of office exposure in a private space in terms of that percentage is somewhat similar to what we have in our CMS portfolio Holdings 25, 30% is in an in office are we we are actually evaluate.
Are those those assets also from.
From the point of view are both maturity.
And in our sort of Sandoz portfolio those office loans in terms of maturity are quite limited in terms of 2023 and 'twenty 'twenty four although we're also because of the subordination levels, we're doing a sort of a bottom up analysis as to how are the subordination levels protecting us from then the.
<unk> performance in those underlying loans as we stress test that and we're stress testing those loans are clearly from the point of view of the appraisal analysis evaluation outsize highlighted Michael and the desk and the cash flow analysis I just highlighted and we're then applying that to the to the actual structure of those of those <unk>.
Structures in terms of subordination levels and what we're finding is as very positive thus far and that is when we stress test those portfolios are we still have subordination levels that.
What would allow us to have a great deal of comfort.
Because of the subordination levels would still be in a stress test environment of 21% or better and that is a quality approach and level of rating. If we looked at that from a sort of a comparable sort of a rating agency perspective.
Hey, Mike that was not included in the stress tests that we included but if you actually look at page 14, and given that 98, 5% of the C. M. B assays are any I see one I think any impact in a stress scenario and again in addition to the commentary that Pat would be very very minor.
Allative to that risk.
Thanks, very much guys it's extremely helpful.
Thanks for the question Michael.
Our next question comes from the line of Sunni come off with Jefferies. Please proceed with your question.
Thanks, Good morning.
All the color on how you go about valuing the office CRE.
It does sound like you have a lot of resources, but just curious is there part of the process, where you go through getting a sort of a third party to kind of validate the analysis just to kind of give you one more check.
Yeah. So typically you would get an appraisal the challenge today as you can imagine it's a need as the appraisals are are probably not as current not as I think active.
Active in and understanding in real time, what's going on within the reconstruction of those cash flows.
Buildings, and how the the tenancy and the market rents relative to the contract for instance, donors or devalue.
Evaluating and changing so we do not sort of.
And that's sort of our analysis go out and get a third party valuation opinion.
We think that our expertise our deep analysis is probably superior frankly to that.
We meet once a week so need with the real estate team and assess these investment options in our investment Committee. These professionals are in there. They are talking about this they have deep relationships with brokers in each one of these subcategories and so I think there is a really honest assessment and value.
<unk> associated with how we keep these on the books and again, it's a it's a rigorous process that is staffed incredibly well did you sneak just to add to that you know we have over 550 institutional investors and over 34 countries and they also feel very comfortable with the process we deploy here.
Got it makes sense and then I guess, a quick one for Ghana I'm just in terms of the outlook for buybacks I guess, you did 150 million here in the first quarter is that about the pace that we should expect going forward or.
Just any color on in terms of expectations on that thanks.
Yeah, I think there'll be volatility quarter to quarter, but I think if you annualize that amount that's in the ballpark and I and I think if you kind of looked at them kind of our free cash flow estimates relative to kind of what you'd be expecting you'd get to that same level. You know obviously, we want to recognize the current environment, we need there.
There is some lumpiness quarter to quarter, we need to take into account, but yeah. I think that's a good indication of what could occur through the rest of the year.
Okay. Thanks.
Thank you.
Our next question comes from the line of Erik Bass with Autonomous Research. Please proceed with your question.
Hi, Thank you I'm in the RIS business net investment income increased pretty materially from the fourth quarter, even adjusting for variable investment income. So I was just hoping you could talk about what's driving that and the outlook going forward.
How we should think about how much of that benefit drops to the bottom line.
Chris Please.
Yeah sure. Thanks for the question, Eric I mean, I think we definitely are seeing three primary drivers and and what's happening in net investment income certainly we've seen the benefit too.
Two the increase in short term interest rates.
And that certainly had a positive effect we've seen some additional timing difference between when the rates are increasing and when that our rates are credited back to the customer. So the lag that's been a second driver and then third we've seen overall growth in the block of our business. So those are the key drivers in NII I think when you look at the supplement and you look.
Adjusted NII it can it's not necessarily the best picture because you also have to take into account the interest that's being credited.
In the Bcf fee line and so that you know there is certainly a benefit that we're seeing but it's not as large as you would see just by looking solely at the NII line. So definitely a benefit we will we expect to see some additional benefits if interest rates continue to rise. Although I think we're kind of nearing the end of the larger increases that we saw.
Over the course of 2022, and we expect to have some benefit but.
We've also set through 'twenty, two and what else reiterate again today that will normalize over time and net interest margin there are competitive pressures in others and that that will tend to normalize over the long term, but we will we expect to see some benefit.
So a follow up Eric.
Yes, the follow up for Pat just curious what youre seeing in terms of client demand for fixed income is interest started to pick up now that rates have stabilized a bit.
And if so where are you seeing new money going into traditional active products, there's more being allocated to passive.
Yeah, Greg Thanks, Eric Thanks for that question, it's been interesting we actually were.
In our fixed income portfolio, we had a couple of things that were kind of interesting in the first quarter one was.
As you know, we're very active in preferreds, and given where the banking prices we.
We did have a little bit of outflow from preferreds interesting to note, though as we sort of communicated to investors and we've gotten to sort of maybe on the other side of the banking crisis.
Vessels are now starting to look at preferreds again, and I've mentioned that because I think our specialty income sort of capabilities continue to be relevant in the marketplace, even with investors moving into money market and two C DS.
We do think theres been a little bit of a pause because of that but there is a lot of active discussions underway about high yield. There's a lot of active discussions I mentioned about preferreds and relatively speaking.
Things that we we think we're very good at like emerging market debt reached though that activity is also increasing in terms of income producing investments.
So where do you think that fixed income once interest rates stabilize and the fed starts to maybe get into a place of not raising rates there'll be maybe more of an interest to get a bigger amount of active investing in fixed income and we're expecting that.
Thank you.
Thanks for the questions.
Our next question comes from the line of Tom Gallagher with Evercore. Please proceed with your question.
Good morning, My first one Deanna just wanted to ask about.
What about some of the details about cash flow generation in the quarter.
Recognizing your seasonal comments I can appreciate that but if I saw for forgetting about seasonality for a minute if I saw for normal capital generation in the quarter versus how much you produced I ended up with about a three.
$350 million to $400 million shortfall versus normal now I'm, assuming PRT consumed around $50 million the seasonal cash payments that you highlighted maybe that's another $50 million to $100 million.
That would leave me with about a $200 million shortfall.
Tell me if that math sort of adds up in <unk>.
And if so.
What else would fill in the gaps here. Thanks.
Yeah. Thanks, Tom for the question I think the seasonality is greater than what you're giving them credit too. If you went back to them you know the roll forward from fourth quarter to first quarter last year.
You know there what we deployed approximately $900 million in the quarter and our capital was reduced by just shy of 900 million and so again very modest free cash flow. So you say you're understating the amount of seasonality I think maybe the the organic opportunities is probably.
In the ballpark.
But but really that seasonality is much greater than what you were anticipating in your roll forward.
There were some modest one timers in the quarter I'd say, either they were anticipated in our capital plan, but we knew they would be pressuring first quarter or are they will reverse in future quarters, but it's really that seasonality that you're understating and I'd take you back to a year ago to kind of do a comparison.
That's that's helpful. Thank you and then my follow up is for Pat the.
Part of it's a question on your updated investment disclosure that 2.9 billion dollar off balance sheet gain on your equity real estate. If I just look at the carrying value versus the current estimated market value.
That's a very big well call it off balance sheet gain how should we think about.
What we should do with that number should we just assume slow steady monetization of the difference is going to help you produce your alternative.
Return goals or would you ever look to do a big acceleration are bigger.
Portfolio shell to create a lot more excess capital.
Yeah, Let me have Deanna go ahead and respond to that.
Given her responsibility over cap March yeah, I think Theres a couple of things every time, you know I think of yeah. We obviously haven't disclosed this over a period of time, but this will be something that we've had in our portfolio. I'm. You know obviously, we're going to do what's right for our investors and our customers over the long term, sometimes we'll see.
That offset some credit cycle, some credit pressures other way other parts of our look.
In our portfolio, sometimes will actually roll it into new equity real estate investments. So it doesn't drop to the bottom line.
But again I think your your bottom line.
Observation relative to that is right.
But but again you know it's not something that we would we would pull just to.
Return to our shareholders because again, we wanted to do what's right over the long term relative to this portfolio. It's a very high quality portfolio, it's very diversified portfolio.
To the dimensionality of it it is a it doesn't have a big concentration of industrial and has a big concentration in and residential. So that's really good I think we've identified a new office in the past what carrying value is over 500, literally a $1 5 billion versus the.
The cost basis of $500 million. So about it's a very diversified portfolio I think we have a lot of flexibility to use our portfolio as deanna highlighted and it's well positioned for that.
Thanks for the questions Tom.
Yeah.
Our next question comes from the line of Alex Scott with Goldman Sachs. Please proceed with your question.
Hi, Good morning, first one I had is on the oral yes expense timing.
Compensation and other came down a pretty good amount year over year and I know you called out expense timing. So I just wanted to see if you could unpack that a little bit for us.
Cognizant of I guess, you guys have been very good at managing expenses over time so.
I want to understand how much of it is like more pure expense timing versus you know good old pressured expense management. The way you guys have been doing the last couple of quarters.
And we try to have good old expense management around here all the time across all the businesses and I think what makes our I guess a little bit unique is the post transaction with.
With the Wells Fargo, IRT business, but Chris you want to provide some additional detail.
Yeah.
Thanks for that Alex I mean, that's what I would say is we continue to exercise good discipline expense management and I think as I said last quarter, we're committed to maintaining our margins and so we're going to take the actions that we need to align revenue and expenses.
We definitely did see some one time benefits from some prior period accruals that were no longer needed. We had some timing, which we think will catch up in the quarter over the course of the year, we're delivering on the expenditure synergies from IRT and we're investing for growth. So when I put all of that together.
We by the end of the day through 2023, we expect our comp and other essentially flat year over year, we'll get some good savings, but we're also investing for future growth as.
As well so hopefully that answers the question the only other thing I'd point out, but no we haven't highlighted as well.
When we're taking these disciplined expense management, we had about $3 million of severance expense in the first quarter that we didn't call out specially we got about seven in the fourth quarter last year, and we had 11 for full year last year. So we're still showing good expense management. Despite some of those additional severance costs and now it's just one thing to point I don't know what you were comparing.
Two but if you're comparing back to the first quarter of 'twenty. Two that would have included expenses relative to the retail fixed annuity business again, that'll normalize and we still had TSA expense and some other items in there as well.
Yep understood.
And maybe just high level on Pgi could you talk us through the outlook for flows and any nuances in your portfolio that they kind of push it one way or the other or should we just think about some of the overall industry pressures and.
Any color you could provide to help us out there.
Please yeah. So so thanks for the question Alex you know clearly I think on the retail side. The platform side Theres still continues to be a lot of investor uncertainty are relative to market conditions. The economy inflation, a path of interest rates and as I mentioned in my response to Eric There is a lot of money there.
To use a flow into money market accounts Cds and that is I think is something that we'll continue to probably be an active area for investors.
That being said I think as I mentioned earlier, we do like our relative position to especially using specialized investment income products as I mentioned in my previous response.
And I think we will continue to see as I highlighted also more active interest in private credit private debt some of the real estate sort of offerings that we believe are viable in this marketplace as we look forward to next year or two.
And so I think that's that's an area of potential growth on the institutional side. The the equity space. We have some strong equity sort of capabilities. We had a couple of nice wins I think we highlighted that in the material in the first quarter.
So I think you know there's there's there's still uncertainty there still a lot of you know sort of spot cap, we need to provide investors where to position themselves in this uncertain marketplace, but our broad based on investment capabilities I think offer a lot of choice to them that's.
Thanks Ben.
Thank you.
Our final question comes from the line of Josh Shanker with Bank of America. Please proceed with your question.
Yeah. Thank you just an easy one I wanted to follow up on you can get.
Tom was asking in the prepared remarks, you talked about the pull forward on your business plan, what's the normal seasonality of deploying capital into the business plan.
Is it usually equal in every quarter and how big is the variance.
Yeah Yeah.
Yeah, I don't think that's an easy answer because every product is different you know.
Again, the one we highlighted was PRT because that was different than what was kind of a normal seasonality, where PRT tends to be in a normal year very back end loaded and we thought again, great opportunity great returns and one I wanted to take advantage of that.
And so again.
The analogy as I said first quarter free cash flow very pressured fourth quarter free cash flow very strong, but again product by product that seasonality is very very different.
Okay I'll, let it go there thank you.
Thank you I appreciate the question Josh.
We have reached the end of the Q&A Mr. Houston Your closing comments please.
Yes, I appreciate that Christine a couple of quick comments, the first of which we appreciate your insights and your questions. Secondly, a large portion of the management team. That's here today was here during that eight or nine periods. We've been through this cycle before and we'll we'll find an appropriate path through this cycle maybe Serge.
Recognizing that we're trying to be very proactive with investors on the disclosures in particular around commercial real estate and office because we think it's the right thing to do to provide that level of transparency also I think it's helpful to understand the clarity and the emergence of our free cash flow again, reaffirming where we had set out.
From the beginning of the year again.
First quarter has had this historically and then also to recognize the fundamentals of the markets, which we serve and by the way the international markets as well, which we didn't get into a lot of conversation today has really held up well. So we're seeing very positive cash cash flow was in both Asia and Latin America. So in spite of some very challenging.
What I would call volatile macroeconomic environments the markets in which we serve have held up very well and it's certainly our intention to deliver on the promises we made during our outlook call. So thank you and look forward to seeing you on the road and have a great day.
Yeah.
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