Q4 2023 Principal Financial Group Inc Earnings Call
Good morning, and welcome to the principal financial group fourth quarter 2023 financial results and 'twenty 'twenty four outlook conference call. There will be a question and answer period. After the speakers have completed their prepared remarks.
Operator: Good morning and welcome to the Principal Financial Group 4th Quarter 2023 Financial Results and 2024 Outlook 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 the star and the number 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
If you'd like to ask a question at that time simply press star and the number one on your telephone keypad comps.
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Operator: We would ask that you be respectful of others and limit yourself to one question 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 fourth quarter and fourth year 2023 earnings and 2024 Outlook conference call. As always, materials related to today's call are available on our website at investors.principal.com. Following a reading of the Safe Harbor Provision, CEO Dan Houston and CFO Deanna Strable will deliver some prepared remarks. We will then open up the call for questions.
We would ask that you'd be respectful of others and limit yourself to one question 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.
President of Investor Relations.
Yeah.
Humphrey Hung Fai Lee: Thank you and good morning, welcome to principal financial group's fourth quarter and full year 2023 earnings in 2020 outlook Conference call.
Humphrey Hung Fai Lee: As always materials related to today's call are available on our website at investors principal dot com.
Humphrey Hung Fai Lee: Following a reading of the safe Harbor provision CEO, Dan Houston, and CFO Deanna <unk> will deliver some prepared remarks, we will then open up the call for questions. Other members of senior management will also be available for Q&A.
Operator: Other members of senior management will also be available for Q&A. Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, and the company does not revise or update them to reflect new information, subsequent events, or changes in strategy.
Humphrey Hung Fai Lee: Some of the comments made during this conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act.
Humphrey Hung Fai Lee: The company does not revise or update them to reflect new information subsequent events or changes in strategy.
Operator: 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. Reconciliation of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures may be found in our earnings release, financial supplements, and slides presentation. We are planning to host our 2024 Investor Day on Monday, November 18th in New York, and look forward to seeing many of you over the coming months. Dan?
Humphrey Hung Fai Lee: 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.
Humphrey Hung Fai Lee: Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures reconciliation of the non-GAAP financial measures to the most directly comparable U S. GAAP financial measures may be found in our earnings release financial supplement and slide presentation. We are planning to host our two.
Humphrey Hung Fai Lee: 24, Investor Day on Monday November 18th in New York and look forward to seeing many of you over the coming months.
Speaker Change: Dan Thanks, Humphrey and welcome to everyone on the call. This morning, I will discuss key milestones and highlights from the fourth quarter and full year 2023, as we continued to execute our strategy with discipline and focus and deliver strong results for our customers and shareholders Deanna will follow with additional details of our results the investment portfolio.
Daniel Joseph Houston: Thanks, Humphrey, and welcome to everyone on the call. This morning, I will discuss key milestones and highlights from the fourth quarter and full year 2023 as we continue to execute our strategy with discipline and focus and deliver strong results for our customers and shareholders. Deanna will follow with additional details of our results, the investment portfolio, our capital position, as well as our 2024 outlook. 2023 was a great year for Principal. We delivered on our ambitious outlook for the enterprise despite a wide range of macro issues, including significant geopolitical events and global inflation. These factors resulted in elevated market and interest rate volatility, which impacted investor risk appetite and increased allocations to cash and cash equivalents.
Deanna: Our capital position as well as our 2020 for outlook 2023 was a great year for principal we delivered on our ambitious outlook for the enterprise. Despite a wide range of macro issues, including significant geopolitical events and global inflation.
Deanna: These factors resulted in elevated market and interest rate volatility, which impacted investor risk appetite and increased allocations to cash and cash equivalents.
Daniel Joseph Houston: Our diversified and integrated business model continues to prove resilient despite these challenges and generated robust fourth quarter and full year results. Starting on slide three, we reported $1.6 billion of full year 2023 non-GAAP operating earnings, or $6.55 per diluted share. Excluding significant variances, earnings per share increased 6% over 2022, at the top end of our 2023 outlook. Our strong capital position and four-year free capital flow enabled us to deliver on our capital deployment strategy. We invested for growth in our businesses and returned more than $1.3 billion of capital to shareholders through share repurchase and common stock dividends, nearly 90% of net income excluding exited businesses.
Deanna: Our diversified and integrated business model continued to prove resilient. Despite these challenges and generated robust fourth quarter and full year results.
Deanna: Starting on slide three we reported $1 $6 billion, our full year 2023, non-GAAP operating earnings or $6 55 per diluted share excluding significant variances earnings per share increased 6% over 2022 at the top end of our 2023 outlook.
Deanna: Our strong capital position in full year free capital flow enabled us to deliver on our capital deployment strategy, we invested for growth in our businesses and returned more than $1 $3 billion of capital to shareholders through share repurchase and common stock dividends nearly 90% of net income excluding exited businesses.
Daniel Joseph Houston: As shown on slide four, we reported $441 million of non-GAAP operating earnings, or $1.83 per diluted share, in the fourth quarter. We ended 2023 with $695 billion of total company managed AUM, up over 9% from 2022. While markets were volatile throughout the year, they finished the year strong. Market performance and foreign currency tailwinds more than offset outflows on a full-year basis. Adjusting for the large withdrawal, as we discussed last quarter, we generated a positive $350 million of PGI institutional net cash flow in the fourth quarter, driven by real estate and fixed income flows. However, retail net cash flow for us and the asset management industry remains challenged as approximately $6 trillion of assets remain in money market funds or cash equivalents.
Deanna: As shown on slide four we reported $441 million of non-GAAP operating earnings or $1 83 per diluted share in the fourth quarter. We ended 2023 with $695 billion of total company managed AUM up over 9% from 2022, while markets were volatile.
Deanna: Throughout the year. They finished the year strong market performance and foreign currency tailwind more than offset outflows on a full year basis adjusting for the large withdrawal as we discussed last quarter, we generated a positive $350 million of pgi institutional net cash flow in the fourth quarter driven by real estate.
In fixed income flows retail net cash flow for us and the asset management industry remains challenged as approximately six trillion dollars of assets remained in money market funds or cash equivalents.
Daniel Joseph Houston: We continue to benefit from diversification of distribution channels among institutional, retail, retirement, private assets, and international geographies. Our organic growth rate measured by net cash flow as a percentage of beginning of period assets has proven more resilient than our active management peers over the last 12 months. As interest rates retreat from their peak, we were well-positioned with the right strategies as investors began to reallocate back into risk-based assets. The pipeline of committed yet unfunded real estate mandates remains strong, currently over $6 billion that we'll put to work opportunistically.
Deanna: We continue to benefit from diversification of distribution channels, among institutional retail retirement private assets and international geographies.
Deanna: Our organic growth rate measured by net cash flow as a percentage of beginning of period assets has proven more resilient than our active management peers over the last 12 months.
Deanna: As interest rates retreat from their peak, we were well positioned with the right strategies as investors begin to reallocate back into risk based assets.
The pipeline of committed yet unfunded real estate mandates remains strong currently over $6 billion that we will put to work opportunistically.
Daniel Joseph Houston: We continue to grow our in-house capabilities, including Principal Alternative Credit, our direct lending franchise that recently surpassed $2 billion in borrower commitments since we launched in 2020. We have generated an 11% IRR since inception, and the current portfolio yield is 13%, making this a compelling offering for our clients. This is yet another testament to our dedication to providing differentiated investment capabilities to clients across all asset classes.
Deanna: We continue to grow our in house capabilities, including principal alternative credit or direct lending franchise that recently surpassed $2 billion in borrower commitments since we launched in 2020.
We have generated an 11% IRR since inception, and the current portfolio yield is 13%, making this a compelling offering for our clients.
Deanna: This is yet another testament of our dedication to providing differentiated investment capabilities to clients across all asset classes.
Daniel Joseph Houston: Turning to slide six, investment performance improved significantly across Morningstar-rated funds and composites, particularly in our retirement-focused asset allocation strategies. While there have been some quarterly fluctuations, we're focused on generating consistently strong, long-term performance for our clients. In Principal International, we ended the quarter with a record $180 billion of total reported AUM.
Deanna: Turning to slide six investment performance improved significantly across Morningstar rated funds and composites, particularly in our retirement focused asset allocation strategies, while there have been some quarterly fluctuations. We are focused on generating consistently strong long term performance for our clients and principal.
Deanna: Internationally, we ended the quarter with a record $180 billion of total reported AUM. The increase was driven by a combination of market performance foreign exchange tailwind and over $2 billion of positive cash flows through 2023 evenly split between Latin America and Asia, while the Asia economy continues to face headwinds.
Daniel Joseph Houston: The increase was driven by a combination of market performance, foreign exchange tailwinds, and over $2 billion of positive cash flows through 2023, evenly split between Latin America and Asia. While the Asian economy continues to face headwinds, we are still confident about the region's long-term potential. We welcomed a new president of Latin America in November, Pablo Springer.
Deanna: We are still confident about the regions long term potential we welcomed a new president of Latin America in November Pablo Springer Pablo joined principal was more than 20 years of industry experience. Most recently as CEO of <unk> investments.
Daniel Joseph Houston: Pablo joins Principal with more than 20 years of industry experience, most recently as CEO of Sura Investments. His deep knowledge of our markets and the customer segments we serve will be valuable in driving growth across the region. Turning to U.S. retirement, we generated strong growth in revenue and earnings in the fourth quarter. Our focus on revenue generation and continued expense discipline helped drive the full year margin above the top end of our guidance range while we continue to invest for future growth. Business fundamentals remain very healthy.
Deanna: His deep knowledge of our markets and the customer segments, we serve will be valuable in driving growth across the region.
Deanna: Turning to U S retirement, we generated strong growth in revenue and earnings in the fourth quarter.
Our focus on revenue generation and continued expense discipline helped drive the full year margin above the top end of our guidance range, while we continue to invest for future growth.
Deanna: Business fundamentals remain very healthy we generated a strong growth in transfer deposits over the fourth quarter of 2022, including a 9% increase in fee based and 36% increase in spread based transfer deposits.
Daniel Joseph Houston: We generated strong growth in transfer deposits over the fourth quarter of 2022, including a 9% increase in fee-based and 36% increase in spread-based transfer deposits. These strong results were driven by growth in retirement plan sales as well as robust pension risk transfer sales which exceeded targeted returns. Total RIS reoccurring deposits increased 12 percent over the year-ago quarter, including a 14 percent increase in the SMB segment.
Deanna: These strong results were driven by growth in the retirement plan sales as well as robust pension risk transfer sales, which exceeded targeted returns.
Deanna: Total RIS reoccurring deposits increased 12% over the year ago quarter, including a 14% increase in the SMB segment. This growth was primarily driven by an increase in participant deferrals and employer matches and retirement plans.
Daniel Joseph Houston: This growth was primarily driven by an increase in participant deferrals and employer matches in retirement plans. While we are pleased to see plan lapses moderate in the fourth quarter, which is typically an active quarter for plan transitions and lineup changes, participant withdrawals increased over the year-ago quarter. All in, we saw a significant improvement in account value net cash flow compared to the fourth quarter of 2022. For the full year, RIS sales increased 9% over 2022, driven by a 17% increase in fee-based transfer deposits and nearly $3 billion in pension risk transfer sales. We continue to leverage our favorable market position with a full suite of retirement and workplace solutions, and we like the good momentum we're seeing in our retirement platforms heading into 2024. And especially benefits, record full-year sales, as well as strong retention, employment, and wage growth contributed to a 9% growth in premium and fees over both the fourth quarter of 2022 and the full year. Attractive segments within the S&B market remain underpenetrated, and we are confident in our ability to serve these customers with a meaningful value proposition.
Deanna: While we are pleased to see plan lapses moderate in the fourth quarter, which is typically an active quarter for planned transitions and lineup changes participant withdrawals increased over the year ago quarter.
Deanna: All in we saw significant improvement in account value net cash flow compared to the fourth quarter of 2022.
Deanna: For the full year RIS sales increased 9% over 2022, driven by a 17% increase in fee based transfer deposits and nearly $3 billion of pension risk transfer sales, we continue to leverage our favorable market position with a full suite of retirement and workplace solutions and like the good momentum we're seeing in our.
Deanna: Retirement platforms heading into 2024 and specialty benefits a record full year sales as well as strong retention employment and wage growth contributed to a 9% growth in premium and fees over both the fourth quarter of 2022 and full year <unk>.
Deanna: Attractive segments within the SMB market remain underpenetrated.
Deanna: And we are confident in our ability to serve these customers with a meaningful value proposition.
Daniel Joseph Houston: Sales and specialty benefits so far this year are tracking to our expectations, and importantly, retention is also strong. These factors give us confidence we will continue to grow faster than the market in 2024. In life, premiums, and fees for the total block increased 5% over the fourth quarter of 2022, including a 26% increase in the business market segment.
Deanna: Sales in specialty benefits. So far this year are tracking to our expectations and importantly retention is also strong.
Deanna: These factors give us confidence, we will continue to grow faster than the market in 2024.
Deanna: In life premium and fees for the total block increased 5% over the fourth quarter of 2022, including a 26% increase in the business market segment.
Daniel Joseph Houston: Our focus on the business market is resonating with distribution partners and has more than offset the runoff in our legacy retail block. I'm excited about the growth opportunities across principal and remain confident that our focus on higher growth markets combined with our integrated product portfolio and important distribution partnerships will continue to create value for customers and shareholders. At our core, we remain committed to providing individuals, businesses, communities, and markets access to essential financial tools, products, and guidance. And we see strong demand for our brand of expertise and support in today's environment. Before turning it over to Deanna, I'd like to highlight an important recognition we received this quarter, included on slide five, along with other 2023 awards in recognition. For the 12th consecutive year, Principal Asset Management was once again named a Best Place to Work in Money Management by Pensions and Investments, earning this recognition every year since the inception of the award.
Deanna: Our focus on the business market is resonating with distribution partners and is more than offset the runoff in our legacy retail block.
Deanna: I am excited about the growth opportunities across principle and remain confident that our focus on higher growth markets combined with our integrated product portfolio, an important distribution partnerships will continue to create value for customers and shareholders.
At our core we remain committed to providing individuals' businesses communities and markets access to essential financial tools products and guidance and we see strong demand for our brand of expertise and support in today's environment before turning it over to Dan I'd like to highlight an important recognition we received this quarter.
Included on slide five along with other 2023 awards and recognition for the 12th consecutive year principal asset management was once again named a best place to work in money management by pensions and investments, earning this recognition every year since the inception of the award.
Deanna: Our recognition like this helps us benchmark progress attract and retain talent and stand out in the marketplace.
Daniel Joseph Houston: Recognition like this helps us benchmark progress, attract and retain talent, and stand out in the marketplace. I'd be remiss if I didn't also take a moment to recognize Pat Halter, President of Principal Asset Management, who announced his retirement after 40 years with the company. I will miss Pat as a business leader and also as a very trusted advisor. I wish him and his family much success in the next phase of their lives.
I'd be remiss if I didn't also take a moment to recognize Pat Halter President of principal asset management, who announced his retirement after 40 years with the company I will Miss Pat as a business leader and also was a very trusted advisor I wish he and his family much success in the next phase of their life. He has guided principal asset management through <unk>.
Deanna: <unk> growth, including further diversification of its active specialty investment capabilities and to private markets and new geographies.
Deanna: I'd also like to congratulate <unk>, who has assumed the role as president of principal asset management Com will join the company in 2019 is an industry veteran with significant experience in investment solutions business strategy client engagement and product development, we closed 2023 with momentum across our diverse portfolio of <unk>.
Daniel Joseph Houston: He has guided Principal Asset Management through significant growth, including further diversification of its active special investment capabilities into private markets and new geographies. I'd also like to congratulate Kamal Bhatia, who has assumed the role as President of Principal Asset Management. Kamal joined the company in 2019 as an industry veteran with significant experience in investment solutions, business strategy, client engagement, and product development. We closed 2023 with momentum across our diverse portfolio businesses. Our success is a testament to the focus and hard work of our nearly 20,000 dedicated global employees. Their ongoing commitment to excellence and to our customers has enabled us to seize opportunities and set the stage for future growth. Deanna?
Deanna: <unk> our success is a testament to the focus and hard work of our nearly 20000 dedicated global employees their ongoing commitment to excellence and to our customers enabled us to seize opportunities and set the stage for future growth Deanna.
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 updates on our investment portfolio, our current capital position as well as details of our outlook for 2020 for full year reported net income was 623 million.
Deanna: Excluding exited business net income was $1 5 billion for the full year with credit losses of $81 million.
Deanna: Fourth quarter net income, excluding exited business was $299 million with $27 million of credit losses.
Deanna D. Strable: 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, updates on our investment portfolio, our current capital position, as well as details of our outlook for 2024. Full year reported net income was $623 million. Excluding exited business, net income was $1.5 billion for the full year with credit losses of $81 million. Fourth quarter net income excluding exited business was $299 million, with $27 million of credit losses.
Deanna: As a reminder, the income from exited business is non economic and is driven by the change in the fair value of the funds withheld embedded derivatives it doesn't impact our capital our free cash flow and can be extremely volatile quarter to quarter.
Deanna: Full year credit drift and losses were modest and better than our expectations at the beginning of the year.
Deanna: Excluding significant variances full year non-GAAP operating earnings was $1 7 billion or $6.92 per diluted share.
Deanna: This was a 6% increase in EPS over 2022 at the top end of our 3% to 6% outlook and included $436 million in the fourth quarter or $1 81 per diluted share.
Deanna D. Strable: As a reminder, the income from exited businesses is non-economic and is driven by the change in the fair value of the funds withheld embedded derivative. It doesn't impact our capital or free cash flow and can be extremely volatile quarter to quarter. Full-year credit drift and losses were modest and better than our expectations at the beginning of the year. Excluding significant variances, full-year non-GAAP operating earnings were $1.7 billion, or $6.92 per diluted share.
Deanna: As detailed on slide 24 significant variances impacted fourth quarter non-GAAP operating earnings by a net positive $5 million on both a pretax and after tax basis and two cents per diluted share.
Deanna: This significant variances included strong <unk> performance, largely offset by lower variable investment income.
Deanna: Looking at macroeconomics in the fourth quarter. The S&P 500 daily average was slightly higher than the third quarter of 2023, and 16% higher than the fourth quarter of 2022.
Deanna: While the S&P 500 index increased 24% from the end of 'twenty two the daily average increased just 4% from the 2022 daily average.
Deanna D. Strable: This was a 6% increase in EPS over 2022 at the top end of our 3-6% outlook and included $436 million in the fourth quarter, or $1.81 per diluted share. As detailed on slide 24, significant variances impacted fourth quarter non-GAAP operating earnings by a net positive $5 million on both a pre-tax and after-tax basis and $0.02 per diluted share. The significant variances included strong CAGE performance, largely offset by lower variable investment income. Looking at macroeconomics in the fourth quarter, the S&P 500 daily average was slightly higher than the third quarter of 2023 and 16% higher than the fourth quarter of 2022. While the S&P 500 index increased 24% from the end of 22, the daily average increased just 4% from the 2022 daily average.
Deanna: In addition, the S&P 500 performed better than mid cap small cap and international equities as well as fixed income and alternatives.
Deanna: Relative to our 2023 outlook the daily average increase was lower than our typical 6% price appreciation assumption, but it was higher than expected heading into the year.
Deanna: Foreign exchange rates were a headwind relative to the third quarter, but a tailwind compared to the fourth quarter of 2022 and on a trailing 12 month basis.
Deanna: Margins across the enterprise remains strong as we took actions to reduce expenses to align with revenue, while investing for growth and increasing scalability.
Deanna: On a full year basis compensation and other expenses increased modestly over 2022, despite elevated severance expense of $20 million in the fourth quarter and $30 million for the full year.
Deanna: Turning to the business units. The following comments excludes significant variances and demonstrate our ability to meet or exceed most of our 2023 guidance ranges.
Deanna: With R. I S fourth quarter pre tax operating earnings were very strong and increased 22% over the fourth quarter of 2022, driven by growth in the business and strong revenue retention higher net investment income and favorable markets.
Deanna D. Strable: In addition, the S&P 500 performed better than mid-cap, small-cap, and international equities as well as fixed income and alternatives. Relative to our 2023 outlook, the daily average increase was lower than our typical 6% price appreciation assumption, but it was higher than expected heading into the year. Foreign exchange rates were a headwind relative to the third quarter, but a tailwind compared to the fourth quarter of 2022 and on a trailing 12-month basis. Margins across the enterprise remained strong as we took actions to reduce expenses to align with revenue while investing for growth and increasing scalability. On a full-year basis, compensation and other expenses increased modestly over 2022 despite an elevated severance expense of $20 million in the fourth quarter and $30 million for the full year.
Deanna: Full year net revenue growth of 4% and the 39% margin were at the high end of our guided ranges our focus on profitable revenue growth is paying off and was aided by favorable macroeconomic impacts.
Deanna: Pgi's pre tax margin of 35% for the full year was within our guided range. A strong result, compared to many of our peers, reflecting disciplined expense management, while navigating a pressured revenue environment <unk> full year revenue growth was slightly below our guided range given the market volatility.
Deanna: <unk> as well as the industry trend of money moving into money market funds in 2023.
Deanna: At $34 million for the full year performance fees ended the year in line with our outlook. Despite a pressured real estate market. This compares to a very strong year in 2022, which had $70 million performance fees are dependent on market conditions as to when we can optimize alpha generation in the portfolio.
Deanna D. Strable: Turning to the business units, the following comments exclude significant variances and demonstrate our ability to meet or exceed most of our 2023 guidance ranges. Starting with RIS, fourth-quarter pre-tax operating earnings were very strong and increased 22 percent over the fourth quarter of 2022, driven by growth in the business and strong revenue retention, higher net investment income, and favorable markets. Full year net revenue growth of 4% and the 39% margin were at the high end of our guided ranges. Our focus on profitable revenue growth is paying off, and it was aided by favorable macroeconomic impact. PGI's pre-tax margin of 35% for the full year was within our guided range, a strong result compared to many of our peers, reflecting disciplined expense management while navigating a pressured revenue environment.
Deanna: Principal international ended the year strong with full year revenue growth of 9% or 32% margin and an 11% increase in pretax operating earnings over 2022.
Deanna: Results benefited from growth in the business higher AUM positive net cash flow and foreign currency tailwind both revenue growth and margin were within our guided ranges.
Deanna: Specialty benefits continued to deliver in 2023 with a 9% growth in premium and fees, a 15% margin and a 17% increase in pre tax operating earnings compared to full year 2022.
Deanna: This was fueled by another year of record sales strong retention and employment and wage growth as well as a more favorable loss ratio all of our metrics for specialty benefits were within our guided ranges and.
Deanna D. Strable: PGI's full-year revenue growth was slightly below our guided range given the market volatility as well as the industry trend of money moving to money market funds in 2023. However, at $34 million for the full year, performance fees ended the year in line with our outlook despite a pressured real estate market. This compares to a very strong year in 2022, which had $70 million. However, performance fees are dependent on market conditions as to when we can optimize alpha generation in the portfolio.
Deanna: And life growth in premium and fees was within our guided range as our focus on business solutions is outpacing the roll off of the legacy block margin was slightly below our guided range, primarily due to lower net investment income as we rightsize the assets backing the business post transaction.
Deanna: Shifting to our investment portfolio remains high quality aligned with our liability profile and well positioned for a variety of economic conditions, we revalued the office real estate portfolio again in the fourth quarter as we have done quarterly throughout 2023.
Deanna D. Strable: Principal International ended the year strong with full-year revenue growth of 9%, a 32% margin, and an 11% increase in pre-tax operating earnings for 2022. Results benefited from growth in the business, higher AUM, positive net cash flow, and foreign currency tailwinds. Both revenue growth and margin were within our guided ranges. Specialty benefits continued to deliver in 2023 with a 9% growth in premium and fees, a 15% margin, and a 17% increase in pre-tax operating earnings compared to full year 2022. This was fueled by another year of record sales, strong retention, and employment and wage growth, as well as a more favorable loss ratio. Additionally, all of our metrics for specialty benefits were within our guided ranges.
Deanna: The commercial mortgage loan portfolio remains healthy the average loan to value of 49% increase modestly throughout 2023, as we expected while the debt service coverage ratio remained stable at two and a half times, reflecting the quality of our portfolio and our disciplined investment approach.
Deanna: Specific to our office exposure in the CML portfolio. There were 10 loans that matured in 2023, reducing our office loan exposure by 12%.
Deanna: All loans were paid off and resolved we did not have any loan extensions or foreclosures in 'twenty two 'twenty three.
Deanna: Looking at the 'twenty 'twenty four office maturities the underlying metrics are generally strong with an average loan to value of 66% and debt service coverage ratio of three eight times.
Deanna: We only have one maturity in the first quarter and it paid off in January.
Deanna D. Strable: In life, growth in premium and fees was within our guided range as our focus on business solutions was outpacing the roll-off of the legacy block. Margin was slightly below our guided range, primarily due to lower net investment income as we right-sized the assets backing the business post-transaction. Moving to our investment portfolio, it remains high quality, aligned with our liability profile, and well positioned for a variety of economic conditions. We revalued the office real estate portfolio again in the fourth quarter, as we have done quarterly throughout 2023. The Commercial Mortgage Loan Portfolio remains healthy; the average loan-to-value of 49% increased modestly throughout 2023, as we expected, while the debt service coverage ratio remains stable at two and a half times, reflecting the quality of our portfolio and our disciplined investment approach. Specific to our office exposure in the CML portfolio, there were 10 loans that matured in 2023, reducing our office loan exposure by 12%. All loans were paid off and resolved. We did not have any loan extensions or foreclosures in 2023.
Deanna: We're actively managing and remain confident in the outcome of the remaining 10 maturities eight of which are slated for the second half of the year.
Deanna: Turning to capital and liquidity, we ended the year in a very strong position with $1 $7 billion of excess and available capital, including approximately $935 million at the holding company, which is above our $800 million targeted level $375 million in our subsidiaries and <unk>.
Deanna: $375 million in excess of our targeted 400% risk based capital ratio, which was 427% at the end of the year.
Deanna: Our capital position and free cash flow reflect robust fourth quarter results and actions, we took to increase capital efficiency, including the establishment of an affiliated Bermuda reinsurance entity and the closure of certain guaranteed retirement products in Hong Kong.
Deanna: Combined these actions freed up more than $200 million of capital in the fourth quarter.
Deanna: On a full year basis, we delivered 100% free capital slow conversion, including organic generation within our 75% to 85% targeted range.
Deanna: As shown on slide three we returned $1 $3 billion to shareholders in 2023, including $700 million of share repurchases and $625 million of common stock dividends.
Deanna D. Strable: Looking at the 2024 office maturities, the underlying metrics are generally strong, with an average loan-to-value of 66% and a debt service coverage ratio of 3.8 times. We only had one maturity in the first quarter, and it paid off in January. We're actively managing and remain confident in the outcome of the remaining ten maturities, eight of which are slated for the second half of the year. Turning to capital and liquidity, we ended the year in a very strong position with $1.7 billion of excess and available capital, including approximately $935 million at the holding company, which is above our $800 million targeted level, $375 million in our subsidiaries, and $375 million in excess of our targeted 400% risk-based capital ratio, which was 427% at the end of the year.
Deanna: This included more than $400 million of capital returned to shareholders in the fourth quarter with approximately $250 million of share repurchases and $160 million of common stock dividends.
Deanna: Last night, we announced a 69 common stock dividend payable in the first quarter of two cent increase from the dividend paid in the fourth quarter and in line with our targeted 40% dividend payout ratio.
Deanna: This demonstrates our confidence in continued growth and overall performance.
Deanna: We remain focused on maintaining our capital and liquidity targets at both the life company and the holding company and we will continue our balanced and disciplined approach to capital deployment.
Deanna: Turning to our outlook for 2024, starting on slide 13, we are well positioned to deliver on our enterprise long term financial targets in 'twenty 'twenty, four with 9% to 12% growth in earnings per share and 75% to 85% free capital flow conversion.
Deanna: In regards to EPS benefits from growth in the business favorable macroeconomic tailwind and higher share repurchases are expected to more than offset continued pressure on real estate Asia and a higher effective tax rate.
Deanna D. Strable: Our capital position and free cash flow reflect robust fourth-quarter results and actions we took to increase capital efficiency, including the establishment of an affiliated Bermuda reinsurance entity and the closure of certain guaranteed retirement products in Hong Kong. Together, these actions freed up more than $200 million of capital in the fourth quarter. On a full year basis, we delivered 100% free capital flow conversion, including organic generation within our 75-85% targeted range.
Deanna: Our higher growth higher return and more capital efficient portfolio will continue to drive an increase in return on equity and we expect to achieve our 14% to 16% targeted range in 2025.
Deanna: We remain committed to returning excess capital to shareholders and are targeting one five to $1 $8 billion of capital deployments. In 2024. This includes 800 million to $1 $1 billion of share repurchases and a 40% dividend payout ratio.
Deanna D. Strable: As shown on slide 3, we returned $1.3 billion to shareholders in 2023, including $700 million of share repurchases and $625 million of common stock dividends. This included more than $400 million of capital returned to shareholders in the 4th quarter, with approximately $250 million of share repurchases and $160 million of common stock dividends. Last night, we announced a $0.69 Common Stock Dividend payable in the first quarter, a $0.02 increase from the dividend paid in the fourth quarter, and in line with our targeted 40% dividend payout ratio.
Deanna: Our board of directors approved a new share repurchase authorization for $1 $5 billion. This is in addition to nearly $300 million remaining under the prior authorization at the end of the year.
Our guidance assumes run rate variable investment income as usual, we'll quantify the impacts to reported results from higher or lower than expected variable investment income as a significant variance on our earnings calls throughout the year.
Deanna: Slide 21 provides details of our alternative investments.
Deanna: Our portfolio is more heavily weighted to real estate with a smaller allocation to private equity and hedge funds.
Deanna D. Strable: This demonstrates our confidence in continued growth and overall performance. We remain focused on maintaining our capital and liquidity targets at both the life company and the holding company and will continue a balanced and disciplined approach to capital deployment. Turning to our outlook for 2024, starting on slide 13, we are well-positioned to deliver on our enterprise long-term financial targets in 2024 with 9 to 12 percent growth in earnings per share and 75 to 85 percent free capital flow conversion. In regards to EPS, benefits from growth in the business, favorable macroeconomic tailwinds, and higher share repurchases are expected to more than offset continued pressure on real estate, Asia, and a higher effective tax rate. Our higher growth, higher return, and more capital-efficient portfolio will continue to drive an increase in return on equity, and we expect to achieve our 14 to 16 percent targeted range in 2025. We remain committed to returning excess capital to shareholders and are targeting $1.5 to $1.8 billion of capital deployments in 2024. This includes $800 million to $1.1 billion of share repurchases and a 40% dividend payout ratio. Additionally, our Board of Directors approved a new share repurchase authorization for $1.5 billion.
Deanna: Variable investment income is difficult to predict but if the current macro environment persists throughout 'twenty 'twenty four we expect continued pressure on prepayment fees and real estate returns.
Deanna: Turning to our business units our outlook for 2024 is grounded in our long term guidance. We included some modeling considerations on slide 14, noting where we expect to perform on an adjusted basis relative to our targeted long term ranges.
Deanna: And I asked benefits from macroeconomic tailwind and growth in the business are expected to drive revenue growth at the high end or slightly above our long term guidance and margin at the upper end of our range.
Deanna: And PCI revenue growth is expected to be at the lower end of our long term guidance as benefits from market tailwind are partially offset by continued pressure on real estate revenue and impacts from recent redemptions.
Deanna: In principal international margin is expected to be in line with 2023 and were expecting low single digit revenue growth, reflecting the impact of foreign currency translation.
Deanna: And continued macro headwinds in Asia.
Deanna: While the closure of the guaranteed retirement products will impact revenue and earnings in Asia. Latin America is expected to continue to lever strong earnings growth.
Deanna: And benefits and protection, we expect favorable loss ratios in specialty benefits to persist in 2024 and expect to be toward the lower half of our long term range. The margin for life insurance is expected to be slightly below the long term range, but improved from 'twenty to 'twenty three.
Deanna D. Strable: This is in addition to nearly $300 million remaining under the prior authorization at the end of the year. Our guidance assumes run-rate variable investment income. As usual, we'll quantify the impacts on reported results from higher or lower than expected variable investment income as a significant variance on our earnings calls throughout the year. Slide 21 provides details of our alternative investments. Our portfolio is more heavily weighted to real estate, with a smaller allocation to private equity and hedge funds.
Before opening for questions I want to remind you of a few seasonality impacts and P. G. I. The first quarter is typically our lowest quarter for earnings due to the seasonality of deferred compensation and elevated payroll taxes.
Deanna: And in specialty benefits and dental claims are typically higher in the first half of the year.
Deanna: These factors contribute to the pattern of free capital flow, which is typically lightest in the first quarter and increases throughout the year.
Deanna: We have good momentum as we start 2024 with a strong capital position and we are well positioned to deliver on our long term financial targets.
Deanna D. Strable: Variable investment income is difficult to predict, but if the current macro environment persists throughout 2024, we expect continued pressure on prepayment fees and real estate returns. Turning to our business units, our outlook for 2024 is grounded in our long-term guidance. We included some modeling considerations on slide 14, noting where we expect to perform on an adjusted basis relative to our targeted long-term ranges. For RIS, benefits from macroeconomic tailwinds and growth in the business are expected to drive revenue growth at the high end or slightly above our long-term guidance and margin at the upper end of our range. In PGI, revenue growth is expected to be at the lower end of our long-term guidance as benefits from market tailwinds are partially offset by continued pressure on real estate revenue and impacts from recent redemptions. In Principal International, margin is expected to be in line with 2023, and we're expecting low single-digit revenue growth, reflecting the impact of foreign currency translation and continued macro headwinds in Asia. While the closure of the Guaranteed Retirement Products will impact revenue and earnings in Asia, Latin America is expected to continue to deliver strong earnings growth.
Deanna: We are grounded in our growth drivers of retirement asset management and benefits and protection and executing on our strategy focused on continuing to drive long term shareholder value.
Speaker Change: This concludes our prepared remarks, operator, please open the call for questions.
Speaker Change: At this time I would like to remind everyone to ask a question. Please press Star then the number one on your telephone keypad.
Speaker Change: Pause for just a moment to compile the Q&A roster.
Speaker Change: Our first question is from Joel her with with Dowling and partners. Please proceed with your question.
Speaker Change: Okay.
Joel: Hey, good morning wanted to start on Pgi and the outlook for the net revenue guidance.
Joel: So you talked about being at the low end. Despite some of the market headwinds and you referenced some of the real estate headwinds I guess can you just talk about your expectation for real estate related activities in 'twenty, four and how that compares to what you experienced in 2023.
Joel: Yes.
Speaker Change: Thanks, Joel and thanks for joining the call I believe this is your first time, the colon and it's great to have you cover PFG and so with that let me have Pat Com, We'll tag team. This response.
Speaker Change: Yes, Joe this is Pat.
Pat: Great to have you on board here.
Pat: I'll just make a couple of comments that come on towards the more maybe specifically about flows because I think that's part of the nature of your question.
As we kind of look forward relative to this year, we are starting to be more cautiously optimistic about our outlook relative to flows Joe we.
Deanna D. Strable: In benefits and protection, we expect favorable loss ratios and specialty benefits to persist in 2024 and to be toward the lower half of our long-term range. The margin for life insurance is expected to be slightly below the long-term range but improve from 2023. Before opening for questions, I want to remind you of a few seasonality impacts. In PGI, the first quarter is typically our lowest quarter for earnings due to the seasonality of deferred compensation and elevated payroll taxes.
Pat: We started to see more investors in the first quarter move into into a little more of the risk side of the equation versus keeping money in cash and cash equivalents I think that was predominantly driven by the fourth quarter in terms of improvements both in the equities and fixed income market.
Pat: Our belief that with.
Pat: Potential fed easing later this year, we continue to see a trend, which we are seeing in the first part of this year of investors starting to engage again in some of our higher value investment activities, but camera will provide more input on specifics on that.
Operator: And in specialty benefits, dental claims are typically higher in the first half of the year. These factors contribute to the pattern of free capital flow, which is typically lightest in the first quarter and increases throughout the year. We have good momentum as we start 2024 with a strong capital position, and we are well positioned to deliver on our long-term financial targets. We are grounded in our growth drivers of retirement, asset management, and benefits and protection, and executing on a strategy focused on continuing to drive long-term shareholder value. This concludes our prepared remarks. Operator, please open the call for questions. At this time, I would like to remind everyone that to ask a question, please press star and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A ROC.
Camera: Thank you Beth Thank you Joe Let me, let me tee up there.
Camera: On cash flow because that's a big.
Camera: Question. So as you heard Dan mentioned earlier in his comments.
Speaker Change: Got any growth rate.
Camera: 2020, particularly when you compare it to other.
Camera: Management peers over the last 12 months.
Camera: We look forward in 2024, we are encouraged by some key big news.
Speaker Change: I'll start off first with the real estate.
Speaker Change: I think we've discussed.
Speaker Change: <unk> discussed this before with you, but I'll reiterate.
We have a strong 6 billion dollar real estate pipeline is ready to go to work as conditions allow us.
Speaker Change: In particular I would highlight for you we see the greatest opportunity in 2024, almost I would say roughly $1 billion of capital that we could put to work in two critical areas one is private debt.
Speaker Change: The market stabilizes here.
Speaker Change: We need to see more opportunity emerging debt and as you know.
Speaker Change: Legacy of operating both on the debt and equity side and then another area where we.
Speaker Change: Continue to see client engagement is on the growth and income side, which is really anchored on strength in data centers.
Joel Hurwitz: Our first question is from Joel Hurwitz with Dowling and Partners. Please proceed with your question. Hey, good morning.
Speaker Change: Those two areas for you on the real estate side.
Speaker Change: But there's more to it.
Joel Hurwitz: I wanted to start on PGI and the outlook for net revenue guidance. So you talked about being at the low end despite some of the market tailwinds, and you referenced some of the real estate headwinds. I guess, can you just talk about your expectations for real estate-related activities in 24 and how that compares to what you experienced in 2023? I'll have, thanks, Joel, and thanks for joining the call. I believe this is your first time to call in. It's great having you cover PFG. And so with that, let me have Pat and Kamal tag team this response.
Speaker Change: I look at our search activity, particularly in our specialty fixed income area is continuing to increase and even in our four acuity does we did see improved net cash flow in that area.
Speaker Change: As Dan mentioned in his opening comments.
Speaker Change: And then the last piece, which may be slow to come by but.
Speaker Change: Uh huh.
Speaker Change: Good progress on as clients are looking for more diversification.
Speaker Change: I spent in small and mid cap equities is going to be.
Speaker Change: It is a conversation we're continuing to have a lot more clients now so I hope that helps you with your question.
Speaker Change: Well, thank you very helpful.
Speaker Change: Yeah. Thanks that was very helpful and best of luck with retirement that wanted to move to pension risk transfer. So you did $2 9 billion and 23, which I think is above the 2.3 or $2 5 billion level that you guys did recently.
Pat: Yeah, Joe, this is Pat, and it's great to have you on board here. I'll just make a couple of comments, and then Tom will talk a bit more, maybe specifically about flows, because I think that's part of the nature of your question. As we kind of look forward relative to this year, we are starting to be more cautiously optimistic about our outlook relative to flows. Joe, we started to see more investors in the fourth quarter move into a little bit more of the risk side of the equation versus keeping money in cash and cash equivalents. I think that was predominantly driven by the fourth quarter in terms of improvements both in the equities and the fixed income market and our belief that with potential Fed easing later this year, we continue to see a trend, which we are seeing in the first part of this year, of investors starting to engage again in some of our higher value investment activities. But Kamal will provide more input on and specifics on that. Sure. Thank you, Pat. Thank you, Joe.
Speaker Change: <unk> talked about a quarter or so ago. So just any color on what you saw in the market in Q4, and then I guess, what's the outlook for 2024, and how does the Bermuda subsidiary impact your your growth targets on your more capital intensive new business.
Speaker Change: Now ill pass this to Chris quickly, but just to be on the record that PRT business continues to be a strong contributor for profitability and growth of the organization was really favorable return profiles, but Chris some additional color. Please.
Chris: Thanks, Joe and good morning.
Chris: Obviously, we had a very strong quarter in PRT.
Chris: And a very strong year overall in our PRT business, we did about $1 2 billion in the fourth quarter and that's really because we saw an opportunity there were both capital and Onboarding constraints in the industry and we were able to take advantage of those constraints and put on some really nice PRT business.
Pat: Let me tee off where Pat left it on net cash flow, because that's a big driver of your question. So, as you heard Dan mention earlier in his comments, our organic growth rate was very resilient in 2023, particularly when you compare it to other active management peers over the last 12 months. As we look forward to 2024, we are encouraged by some key signals. I'll start off first with our real estate pipeline.
Chris: All above our targeted return levels. So so really really a great opportunity. We continue to believe we have great advantages in the PRT market, both because of our expertise in DB.
Chris: On the scale that we have our focus on the small to medium size type PRT opportunities as well as our ability to capture our DB clients when they decided to do a plan termination. So if we look at the overall sales.
Kamal Bhatia: I think we have discussed this before with you, but I'll reiterate that we have a strong $6 billion real estate pipeline that is ready to go to work as conditions allow us. In particular, I would highlight for you that we see the greatest opportunity in 2024 of almost, I would say roughly a billion dollars of capital that we could put to work in two critical areas. One is private debt.
Chris: In 2023 about 20% of the premium and about 50% of the cases actually came from existing PFG customers and so that really gives us a nice opportunity to grow our PRT business and the team is just doing <unk>.
Chris: Excellent job as we look forward to 2020 for the funding levels of plans remain robust at about 107% as estimated by Mercer at the end of the year.
Kamal Bhatia: As the market stabilizes here, we continue to see more opportunities emerging there. And as you know, we've had a strong legacy of operating both on the debt and equity sides. And then another area where we continue to see client engagement is on the growth and income side, which is really anchored by our strength in data centers. So I would highlight those two areas for you on the real estate side. But there's more to it than that.
Chris: And so we continue to expect to see strong industry sales across PRT I think the industry is projecting something in the neighborhood of about $40 billion.
We're targeting somewhere in the sort of two and a half to $3 billion range for 2024 and that really is focused on as much about the returns that we're able to get were not trying to maximize overall PRT premiums were trying to get the best return on the capital that we're returning that were <unk>.
Kamal Bhatia: If I look at our search activity, particularly in our specialty fixed income area, it's continuing to increase. And even in our 4Q results, we did see improved net cash flow in that area, as Dan mentioned in his opening comments. And then the last piece, which may be slow to come by, but we are seeing good progress on, is clients are looking for more diversification. And our strength in small and mid-cap equities is going to be a conversation we are continuing to have with a lot more clients now. So I hope that it helps you with the question you asked. Thanks, very helpful.
Chris: <unk> in that business, so feel really really good about where we sit on PRT. Your last question on Bermuda Bermudez, Janet can provide more details, but Bermuda is a nice opportunity for us.
Chris: We opened up in the fourth quarter I think it gives us an additional ability to look at capital efficiency and again continue to think about how do we get good returns on the capital we put in that business. So hopefully that answers your questions Joel Thanks, Phil for the question.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Our next question Ryan Kruger with K B W. Please proceed with your question.
Ryan Krueger: Hey, Good morning. My first question is on Hong Kong could you provide some additional detail.
Some of the impact specifically to the exit of the guaranteed product.
Joel Hurwitz: Yeah, thanks. That was very helpful. And best of luck with the retirement, Pat. I wanted to move to pension risk transfer. So you did $2.9 billion in 2023, which I think is above the $2.3 billion or $2.5 billion level that you guys had recently talked about a quarter or so ago. So any comment on what you saw in the market in Q4? And I guess what's the outlook for 2024?
Ryan Krueger: And also maybe a little bit more color on why you decided to do this.
Speaker Change: Yeah, I'll hit that at a high level and then pass it to Deanna just just know that principle remains supportive.
Deanna: The E&P business reform, that's going on there our focus continues to remain on our customer experience and making sure that we're providing fee based investment options that are most attractive in that marketplace, but this guaranteed component was one that we didn't necessarily like the return profile on I'll have Dan to give you some more <unk>.
Deanna: Sites on implications on the business.
Joel Hurwitz: And how does the Bermuda subsidiary impact your growth targets for your more capital-intensive new business? I'll pass this to Chris quickly, but just to be on the record that that PRT business, you know, continues to be a strong contributor to profitability and growth to the organization with really favorable return profiles. Chris, some additional color, please.
Yeah, Ryan just a little bit more color. There. This was a kind of a legacy product that we offered as part of our MTF retirement plans.
Deanna: But as Dan mentioned, it was more capital intensive than other investment options and it was.
Daniel Joseph Houston: Not meeting the return thresholds that we really wanted so we looked at it as an opportunity.
Chris: Yeah, thanks. Thanks, Phil. Good morning.
Daniel Joseph Houston: To exit that business and.
Daniel Joseph Houston: And just to talk a little bit about the impact.
Chris: You know, obviously, we had a very strong quarter in PRT. And a very strong year overall. In our PRT business, we did about 1.2 billion in the fourth quarter. And that's really because we saw an opportunity there were both capital and onboarding constraints in the industry, and we were able to take advantage of those constraints and put on some really nice PRT business at well above our targeted return levels. So it is really, really a great opportunity.
Daniel Joseph Houston: Those products had about $1 billion in EU Lam.
Actually retain about $800 million to $900 million of it in other asset classes that did not have the same capital.
Daniel Joseph Houston: Implications to it and $200 million actually left principles, you actually look at the AUM roll forward.
Daniel Joseph Houston: You'll see $200 million in that operations disposed line, which is really the impact of that from a financial perspective.
Chris: We continue to believe we have great advantages in the PRT market, both because of our expertise in DB, the scale of our focus on the small to medium-sized type PRT opportunities, as well as our ability to capture our DB clients when they decide to do a plan termination. So if we look at the overall sales in 2023, about 20% of the premium and about 50% of the cases actually came from existing PFG customers. And so that really gives us a nice opportunity to grow our PRT business, and the team is just doing an excellent job. As we look forward to 2024, the funding levels of plans remain robust at about 107 percent, as estimated by Mercer at the end of the year.
Daniel Joseph Houston: The benefit of releasing some capital in the fourth quarter think about magnitude of $30 million to $40 million, we actually expect a similar amount of relief on that same block early in 2024.
Obviously that is positive from a capital implication perspective.
Daniel Joseph Houston: But it does have an impact.
Daniel Joseph Houston: On our revenue and operating earnings as we think of 2024 and will pressure on a pre tax basis, our Hong Kong earnings at about $10 million.
Daniel Joseph Houston: Yeah.
Speaker Change: Great. Thank you and then.
Speaker Change: Other question was just on can you give a little.
Speaker Change: More information on how RIS fee flows looked into 2023 on the as in the SMB market and key trends you see there.
Chris: And so we continue to expect to see strong industry sales across PRT. I think the industry is projecting something in the neighborhood of about 40 billion. We're targeting somewhere in the sort of 2.5 to 3 billion range for 2024, and that really is focused on as much about the returns that we're able to get. We're not trying to maximize overall PRT premiums.
Speaker Change: Another key market for PFG for sure Chris will provide some additional insights there.
Speaker Change: Yes.
Chris: I think we would say that SMB continues to be very resilient.
Chris: And overall.
Fundamentals.
Our F&B transfer deposits in SMB, we're up 12% on a trailing 12 month basis.
Joel Hurwitz: We're trying to get the best return on the capital that we're returning and that we're investing in that business. So I feel really, really good about where we sit on PRT. And the last question on Bermuda. I mean, Bermuda is, you know, Deanna can provide more details, but Bermuda is a nice opportunity for us that we will open up in the fourth quarter. It gives us an additional ability to look at capital efficiency and, again, continue to think about how we get good returns on the capital we put in that business. So hopefully, that answers your questions, Joel. Thanks, Joel, for the questions. Thank you.
Chris: When we think about recurring deposits.
Chris: The S&P was up 14%.
Chris: So again, we just we see very healthy fundamentals coming out of our small to medium size.
Clients, so really really healthy.
Speaker Change: Hopefully that helps great.
Speaker Change: Thank you.
Speaker Change: Our next question is from Sumit Kumar with Jefferies. Please proceed with your question.
Speaker Change: Thanks.
Sumit Kumar: Maybe just to start again on the Bermuda subsidiary.
Sumit Kumar: Are you looking at opportunities to put some of your in force business in there to generate some capital efficiencies and.
Sumit Kumar: If so can you give us any kind of ballpark in terms of what youre looking at target for 'twenty four in terms of capital freed.
Ryan Krueger: Our next question is from Ryan Krueger with KBW. Please proceed with your question. Hey, good morning.
Sumit Kumar: Yes, yes.
Speaker Change: Yeah, I'll, just step back a little bit to meet and talk about the purpose for that entity.
Daniel Joseph Houston: My first question is on Hong Kong. Could you provide some additional detail on the impact specifically on the exit of the guaranteed product and, and also maybe a little bit more color on why you decided to do this? Yeah, I'll hit that at a high level and then pass it to Deanna.
Speaker Change: Again, we constantly evaluate opportunities to create value for our customers and our shareholders that led to us setting up the entity and that was we did receive approval in the fourth quarter.
Speaker Change: The ultimate focus of that is to support our PRT in our term life insurance business.
Daniel Joseph Houston: Just know that principal remains supportive of the EMPF business reform that's going on there. Our focus continues to remain on the customer experience and making sure that we're providing fee-based investment options that are most attractive in that marketplace. But this guaranteed component was one that we didn't necessarily like to return the profile on.
With the ultimate focus on new sales.
Speaker Change: But to kind of start the company, we did see some in force business to that both on the PRT and the life side and that cognizant that did benefit us about $200 million and our free capital flow in the fourth quarter for.
Deanna D. Strable: I'll have Deanna give you some more insights on the implications for the business. Yeah, Ryan, just a little bit more color there. You know, this was a kind of a legacy product that we offered as part of our MPF retirement plan. But as Dan mentioned, it was more capital intensive than other investment options, and it was not meeting the return thresholds that we really wanted.
Speaker Change: For 24 will again be much more focused on using next Christmas.
Speaker Change: For new sale, providing us capital flexibility, allowing us to take advantage on growth at more capital efficient level.
Speaker Change: And ultimately we'll assess if there's other uses there but our focus is on that new sale other than what was needed to see the company.
Deanna D. Strable: So we looked at an opportunity to exit that business, and just to talk a little bit about the impact, those products had about a billion dollars in AUM. We actually retained about $800 to $900 million of it in other asset classes that did not have the same capital implications on it, and $200 million actually left as principal.
Okay. That's helpful and then I guess shifting to RIS fee. So one of the things that we're hearing from I guess one of your peers is that.
Speaker Change: You know as participants reach retirement age they are actually starting to take money out and put it into products that have higher yields I'm, assuming it's rollover into fixed annuities or fixed indexed annuities. So can you I know you gave us the lapses and withdrawals on a consolidated basis can you just give us some color on what you're seeing at kind of the.
Deanna D. Strable: If you actually look at the AUM roll forward, you'll see $200 million in that operations disposal line, which is really the impact of that. From a financial perspective, it had the benefit of releasing some capital in the fourth quarter. Think about the magnitude of $30 to $40 million. We actually expect a similar amount of release on that same block early in 2024. Obviously, that is positive from a capital expenditure perspective, but it does have an impact on our revenue and operating earnings as we think of 2024. And we'll pressure on a pre-tax basis our Hong Kong earnings at about $10 million. Great, thank you.
Speaker Change: The participant level are you seeing a pickup in withdrawals and maybe how current trends compare to recent years.
Speaker Change: They're supposed to.
Speaker Change: Yes. Thanks for the question, Yes, I would say that we saw in 2003, a modest increase in participant withdrawals, primarily due to overall retirements than due to either loans or withdrawals and so we are seeing a modest.
Speaker Change: A modest increase in the withdrawal rates there on the participants but that being said again when you look at the participants. We're also seeing really healthy underlying fundamentals. We're seeing deferrals are up significantly over 8% matches by employers are up so we're seeing a lot of things that are feeding overall growth.
Ryan Krueger: And then the other question was just, can you give a little more information on how RISC flows looked in 2023 as in the SMB market and key trends you see there? And another key market for PFG for sure. Chris, wanna provide some additional insights there?
Speaker Change: The recurring and account value growth, but we definitely are seeing an increase in some retirements and modest increase in retirements.
Chris: Yeah, I mean, I think we would say that S&B continues to be very resilient. In overall fundamentals, our S&B transfer deposits in S&B were up 12% on a trailing 12 month basis. When we think about recurring deposits, the S&P was up 14%, so again, we see very healthy fundamentals coming out of our small-to-medium-sized clients, so really, really healthy. Hopefully that helps, Ryan
Speaker Change: One thing that is sort of note about about these deposits for those people, who oftentimes keep their money inside the existing 401 gate plans, it's because think about those as being institutionally priced like those investment options, so leaving money and the plan is clearly one of those options for those that want to distance themselves from an employer they can see.
Obtain a rollover IRA with principal and again Thats, a very active part of our of our strategy.
Ryan Krueger: Thank you. Our next question is from Suneet Kamath with Jeffreys. Please proceed with your question. Thanks.
Speaker Change: But we also have to remember that there's a lot of people that are literally drawing down there.
Suneet Kamath: Maybe just to start again on the Bermuda subsidiary. Are you looking at opportunities to put some of your existing business in there to generate some capital efficiencies? And, you know, if so, can you give us any kind of, you know, ballpark in terms of what you're looking to target for 24 in terms of capital free, Deanna? Please. I'll just step back a little bit, Suneet, and talk about the purpose of that entity.
Speaker Change: Therefore, when key account balances of retirement to live off and Thats. The business that we're in and we're fortunate to also be able to have a competitive annuity income options for these individuals. So we're not surprised but at the same time. There is a lot of effort that goes into retaining these assets because again, we believe we have great solutions for those individuals.
Speaker Change: Great question.
Thanks.
Speaker Change: Our next question is from John Barnidge with Piper Sandler. Please proceed with your question.
Deanna D. Strable: Again, we constantly evaluate opportunities to create value for our customers and our shareholders. That led to us setting up the entity, and we did receive approval in the fourth quarter. The ultimate focus of that is to support our PRT and our term life insurance business with the ultimate focus on new sales, but to kind of start the company, we did feed some in-force business to that, both on the PRT and the life side, and that did give us about $200 million in our free capital flow in the fourth quarter. For 24, we'll, again, be much more focused on using this, as Chris mentioned already, for new sales, providing us capital flexibility, allowing us to take advantage of growth at more capital-efficient levels, and ultimately, we'll assess if there's other uses there, but our focus is on that new sale other than what was needed to feed the company. Okay, that's helpful.
John Bakewell Barnidge: Good morning, and thank you very much for the opportunity.
John Bakewell Barnidge: My question is around the severance withdraw wins towards looking to more greatly unify operations.
John Bakewell Barnidge: In principal global investors.
John Bakewell Barnidge: We're further into the shared umbrella principal asset management.
John Bakewell Barnidge: Yes.
John Bakewell Barnidge: Reality is.
John Bakewell Barnidge: We always align our expenses with our revenues and this severance was really spread across the organization and its totality, there's not a lot of fanfare around that but it's making sure that we're just aligning expenses. Accordingly, so there isn't any one spot and it's all principles ongoing efforts to manage expenses.
Speaker Change: And again, that's no different than what we've done previously John So hopefully that helps.
Speaker Change: Okay. Thank you very much and my follow up question lots of companies have been calling out the opportunity for supplemental voluntary products has a growth vertical can you maybe talk about the opportunity set for your company.
Speaker Change: General product development pipeline for benefits.
Speaker Change: Yes, I'll throw that over to Amy just second I was actually looking back at our principal well-being index that was done back in November and again. It was ironically smbs actually have a 65% favorable outlook from from a financial perspective, 73% feel that's getting better from here and he.
Deanna D. Strable: And then I guess shifting to a RAS fee. So one of the things that we're hearing from, I guess, one of your peers is that, You know, as participants reach retirement age, they're actually starting to take money out and put it into products that have, you know, higher yields. I'm assuming it's a rollover into fixed annuities or fixed indexed annuities. So can you, I know you give us the lapses and the withdrawals on a consolidated basis. Can you just give us some color on what you're seeing at kind of the participant level? Are you seeing a pickup in withdrawals and maybe how current trends compare to, you know, recent years? Yeah, thanks for the question.
So site, specifically benefits as a way to attract and retain talent. So again, it's a very favorable environment for Smbs and coordinating these one of our best subject matter experts on this.
Amy: Yeah. Thanks for the question and Dan you've got it right. There is a there is an appetite for these products theres a need for that what I would say is.
Speaker Change: Most people see the use of these supplemental products not as a replacement for some of the core coverages, they're putting in place. So we're still seeing a high interest in getting core income replacement products done.
Chris: Yeah, I would say that we saw a modest increase in participant withdrawals in 23, primarily due to overall retirements than due to either loans or withdrawals. And so we are seeing a modest increase in the withdrawal rates there among the participants. But that being said, again, when you look at the participants, we're also seeing really healthy underlying fundamentals. We're seeing deferrals are up, you know, significantly over 8%. Matches by employers are up,
Small and midsize businesses are still taking care of their major medical needs, but we're adding on these critical illness.
Accident hospital indemnity to cover the things that arent covered by some of the other.
Speaker Change: Pieces of insurance, so when you look at like Oh.
Speaker Change: High deductible plan that you'd have to get up to $7500 before the plan would kick in to help pay it's helping meet some of those expenses. So what I would say is these products in our portfolio make a ton of sense and you've seen us add critical illness, you've seen us add accident and you've seen us.
Daniel Joseph Houston: So we're seeing a lot of things that are feeding overall growth, the recurring and account value growth. But we definitely are seeing an increase in some retirements, a modest increase in retirement. Suneet, one thing to sort of note about these deposits is that for those people who often keep their money inside the existing 401k plans, it's because, think about those as being institutionally priced; they like those investment options, so leaving money in the plan is clearly one of those options. For those that want to distance themselves from an employer, they can still obtain a rollover IRA with principal, and again, that's a very active part
Speaker Change: Most recently hospital indemnity, that's giving us the ability to have the worksite portfolio that helps complement the things that they're doing we're expecting and are seeing growth in excess of 15% up to 20% on those product sets now our base on those sets its pretty small, but it is responsive to the marketplace.
Daniel Joseph Houston: But we also have to remember that there are a lot of people that are literally drawing down their 401k account balances in retirement to live off of, and that's the business that we're in, and we're fortunate also to be able to have competitive annuity income options for these individuals. So we're not surprised, but at the same time, there's a lot of effort that goes into retaining these assets because, again, we believe we have great solutions for those individuals. But I appreciate the question. Our next question is from John Barnidge with Piper Sandler. Please proceed with your question. Good morning.
Speaker Change: The last point I would offer is those are also giving us the ability with the type of financial security in place that if people have those benefits in place they are better able to participate in some of the other programs like saving in a 401K or investing in the places that makes sense for them as an investor So that if you.
Speaker Change: Got these products in place then our ability to extend to other pieces of the principles great product set is even higher.
Speaker Change: Thank you thanks, John Thanks for good questions.
John Bakewell Barnidge: Thank you very much for the opportunity. My question is around severance. Was there a lens towards looking to more greatly unify operations of PI and principal global investors now that we're further into the shared umbrella of principal asset management? Yeah, you know, the reality is, you know, we always align our expenses with our revenues. And this severance is really spread across the organization in its totality. There's not a lot of fanfare around that, but it's making sure that we're just aligning expenses accordingly. So there isn't any one spot.
Speaker Change: Our next question is from Tom Gallagher with Evercore ISI. Please proceed with your question.
Speaker Change: Okay.
Thomas Gallagher: Good morning.
Thomas Gallagher: A couple of questions first is just.
Thomas Gallagher: <unk> alter.
Thomas Gallagher: Alternative returns I think you're assuming.
Thomas Gallagher: And in line with your long term expectation, but then there was a footnote just saying if current conditions persist.
Thomas Gallagher: In real estate in particular, you would.
Thomas Gallagher: I guess potentially youre going to come in below that.
Daniel Joseph Houston: And it's all about principles, ongoing efforts to manage his expenses. And again, that's no different than what we've done previously, John. So hopefully, that helps.
Thomas Gallagher: Can you just sort of clarify what youre thinking on that would you expect alternatives to be softer in <unk>.
<unk> based on what Youre seeing today.
John Bakewell Barnidge: Thank you very much. My follow-up question: lots of companies have been calling out the opportunity for supplemental voluntary products as a growth vertical. Can you maybe talk about the opportunities for your company, as well as the general product development pipeline for benefits? Yeah, I'll throw that over to Amy just a second.
Thomas Gallagher: There's a wish or you wish you had a great crystal ball of which we don't Dan do you want to provide some additional color yes, Tom. Thanks for the question. There. The first thing I would reiterate is our ranges that we've put out there for margin and revenue growth.
Daniel Joseph Houston: On on X significant variant basis.
Amy C. Friedrich: I was actually looking back at our principal well-being index that was done back in November. And again, it was ironic, the SMBs actually have a 65% favorable outlook from a financial perspective. 73% feel it's getting better from here, and they also cite benefits specifically as a way to attract and retain talent. So again, it's a very favorable environment for SMBs. And, of course, Amy's one of our best subject matter experts on this. Amy?
Daniel Joseph Houston: And obviously the last few years very variable investment income has been one that we have called out.
Daniel Joseph Houston: As it has run below our actual level just to put that in a little bit of perspective on our run rate return for our al portfolio is in that eight to eight 5% range.
Daniel Joseph Houston: And we actually came in in 'twenty three more in that 6% to 7% level and we did provide on the slide deck, a actual breakdown of our alternative portfolio, which is about a five little over $5 billion portfolio.
Amy C. Friedrich: Yeah, thanks for the question. And Dan, you've got it right. There's an appetite for these products. There's a need for them. Most people see the use of these supplemental products, not as a replacement for some of the core coverage they're putting in place.
Daniel Joseph Houston: So given the kind of the difficulty in actually predicting that.
Amy C. Friedrich: So we're still seeing a high interest in getting core income replacement products done. Small and mid-sized businesses are still taking care of their major medical needs, but we're adding on critical illnesses, accidents, hospital indemnity to help cover the things that aren't covered by some of the other pieces of insurance. So when you look at a high-deductible plan that you'd have to get up to $7,500 before the plan would kick in to help pay, it's helping meet some of those expenses.
We felt it was prudent to give you guidance on a run rate basis, and also because we actually see a path to getting to that run rate basis, either late in 'twenty four as we think about 2025 and I know youre aware, but our portfolio is more weighted are heavily concentrated in real.
Speaker Change: And lastly, Tom.
Speaker Change: Our case into private equity and hedge fund.
Speaker Change: We think of 'twenty three.
Amy C. Friedrich: So what I would say is these products in our portfolio make a ton of sense, and you've seen us add critical illness, you've seen us add accidents, and you've seen us add, most recently, hospital indemnity. That's giving us the ability to have a worksite portfolio that helps complement the things that they're doing. We're expecting and are seeing growth in excess of 15%, up to 20%, on those product sets. Now our base on those sets is pretty small, but it's responsive to the marketplace. The last point I would offer is that these are also giving us the ability to put the type of financial security in place that if people have those benefits in place, they're better able to participate in some of the other programs, like saving in a 401k or investing in the places that make sense for them as an investor. So if you've got these products in Thank you. Thanks, John. Thanks.
Speaker Change: Actually the places, where we fell below our expectations was prepays not surprising given the interest rate environment.
Speaker Change: The elements of our bond portfolio and also real estate, which again more of ours comes from real estate transactions and 23 was was obviously not at time to actually take advantage of that are all full our private equity and hedge actually perform better than we expected.
Speaker Change: And <unk>.
Speaker Change: Again helped to offset some of the impact that we saw there.
Speaker Change: So one of the things that again, it's probably easier to think about the next quarter or two than it is the full year Prepays and real estate transactions that will probably run below our expectations, but it's interesting if we actually did have VII.
Speaker Change: At the same level that we experienced in 'twenty three our reported EPS would actually be in that 9% to 12% growth rate as well as our adjusted and our outlook. So hopefully that gives you a little bit more color.
Thomas Gallagher: Our next question is from Tom Gallagher with Evercore ISI. Please proceed with your question. Good morning.
Speaker Change: Yeah.
That does thanks, Thanks, Deanna and just for a follow up just.
Thomas Gallagher: Let's see a couple of questions. First, on alternative returns, I think you're assuming in line with your long-term expectation, but then there was a footnote just saying if current conditions persist, on real estate in particular, you would, I guess, potentially, come in below that. Can you just sort of clarify what you're thinking on that? Would you expect alternatives to be softer in 1Q or 2Q based on what you're seeing today? This is where you wish you had a great crystal ball, which we don't. Deanna, do you want to provide some additional color?
Speaker Change: Could you provide what's embedded in your your guide related to both net flows and Raf's in Pgi.
Deanna: Yeah, I think probably come on Chris would be in the best position to talk through that.
Speaker Change: Yeah.
Speaker Change: Maybe Matt Yeah. So so so I think from from a look forward perspective, Tom we're seeing improvement from 2023.
Speaker Change: As <unk> highlighted we're seeing an improvement in our broad range of investment activities, starting with fixed income and we think fixed since it's going to be a benefactor and a recipient of the fed policy action that we believe in our semi to occur later this year in terms of.
Daniel Joseph Houston: Yeah, Tom, thanks for the question there. You know, the first thing I would reiterate is our ranges that we've put out there for margin and revenue growth are all on an X-significant variant basis. And obviously, in the last few years, variable investment income has been one that we have called out as it has run below our actual level. Just to put that in a little bit of perspective, our run rate return for our alternative portfolio is in that 8 to 8.5 percent range. And we actually came in at 23, more in that 6 to 7 percent level.
Speaker Change: Sort of upset that easy so that's the first for the protocol relative to I think flow is coming in a more positive direction in 2024 come a highlight of real estate, we still have a very balanced approach in terms of what we can do in real estate. Both in terms of the pipeline and the opportunities both in debt and data centers and other specialized investment activities.
Speaker Change: We don't talk about this enough, but Europe is actually a very active place for US right. Now also in terms of real estate and so thats. The area just to highlight and we have some emerging opportunities in Asia future to talk about and then I think in terms of what kind of highlighted just to sort of again reiterate we see some really strong interest in equity activity, particularly in the small mid cap.
Deanna D. Strable: And we did provide in the slide deck an actual breakdown of our alternative portfolio, which is a little over a $5 billion portfolio. So given the kind of difficulty in actually predicting that, you know, we felt it was prudent to give you guidance on a run rate basis. And also because we actually see a path to getting to that run rate basis either late in 24 as we think about 2025, and I know you're aware, but our alternative portfolio is more weighed or heavily concentrated in real estate and has a less allocation to private equity and hedge funds. And you know, if we think of 23, the places where we fell below our expectations were prepays, not surprising given the interest rate environments and the elements of our bond portfolio, And 23 was obviously not a good time to actually take advantage of that.
Speaker Change: So but to round it I'll, let carlos sort of finish out sort of the things that we didn't discuss sure.
Carlos: Sure. So I think that covered it well the only other data point I'd actually you asked about NCS preliminary sit in asset management I think we are managing the whole basis for revenue and margin as well.
Carlos: Critical as you know we have a very large book of business across retirement wealth and in distribution and as you can see in our Ste.
Carlos: Stable fee rate, both in Florida Q.
Carlos: We are acutely focused on retention.
Carlos: Mentioned and I mentioned earlier, we do see growth on our institutional segment.
Carlos: We have guided and DNS comments I think we are looking at a stable margin guidance at this stage, where we obviously make sure. Our expenses are in line with our revenue and we've also given some revenue guidance, but those are the measures. We are looking at in addition to ends here Chris any color.
Deanna D. Strable: Our overall portfolio, our private equity and hedge actually performed better than we expected and again helped to offset some of the impact that we saw there. So one of the things that, again, it's probably easier to think about the next quarter or two than it is about the full year. Prepays and real estate transactions will probably run below our expectations, but it's interesting that if we actually did have BII be at the same level that we experienced in 23, our reported EPS would actually be in that 9 to 12% growth rate as well as our adjusted EPS and our outlook. So hopefully, that gives you a little bit more color. That does.
Chris: From a from an IRS perspective, Tom.
Chris: It's very difficult to project net cash flows for four years as you know, we see a lot of seasonality in the fourth quarter and a lot of activity for plan.
Speaker Change: Transitions and lineup changes I think what I'd also reiterate what we've said before which is net cash flow is just one measure to look at and not all net cash flow is not created equal and we're really focused on increasing revenue in the profitable growth in our book.
Thomas Gallagher: Thanks, Deanna. And just for a follow-up, could you please provide what's embedded in your guide related to both NetFlows and RAS and PGI? Yeah, I think probably Connell and Chris would be in the best position to talk through that. Yeah, maybe that.
Speaker Change: It's really where we're focused and I think you'll see our results and the guidance for 'twenty four very consistent with that approach to managing the business.
Speaker Change: What I would say is we're going to continue to remain disciplined on priority on the pricing we are going to drive more revenue and as we look towards 24, we see continued strong transfer deposits.
Pat: Yeah, so, so, I think from a look forward perspective, Tom, we're seeing improvement in 2023. As Kamal highlighted, we're seeing improvement in our broad range of investment activities, starting with fixed income. And we think fixed income is going to be a beneficiary and a recipient of the Fed policy actions that we believe in are assuming to occur later this year in terms of a sort of Fed FedEasy. So that's the first sort of protocol relative to, I think, flows coming in a more positive direction in 2024. Kamal highlighted real estate; we still have a very balanced approach in terms of what we can do in real estate, both in terms of the pipeline and the opportunities, both in debt and data centers and other specialized investment activities. We don't talk about this enough, but Europe is actually a very active place for us right now, also in terms of real estate.
Speaker Change: We see solid recurring deposit growth and we see a moderation in the contract lapse rate all of which is leading to that revenue guidance.
Speaker Change: At or above our long term range and margin at the upper end of our long term range. So that's how I'd respond to that question Tom Thanks for the question Tom.
Speaker Change: Okay. Thanks.
Speaker Change: Our next question is from Jimmy Buhler with J P. Morgan. Please proceed with your question Hi, Good morning that good luck and congratulations on your retirement.
Jimmy Bhullar: I had a question first for Chris on Alright atrophied.
Jimmy Bhullar: Flows and it's along the lines that you've discussed in response to other questions as well, but if you think about it the environment overall.
Jimmy Bhullar: For retirement plan should be pretty good, but the tight labor market strong GDP growth and yet your flows have been negative each of the last two years and each of the last three quarters. So I think some of it was the world.
Pat: And so that's an area just to highlight. And we have some emerging opportunities in Asia and the future to talk about. And then I think in terms of what Kamal highlighted, just to sort of, again, reiterate, we see some really strong interest in equity activity, particularly in small and mid-cap. So, to round it out, I'll let Kamal sort of finish out sort of the things that we didn't discuss. Sure.
Jimmy Bhullar: Lapses some of it it seems like from your comments that you're implying that the market's competitive and you kind of stay disciplined on price. So what if you could just give us some detail on what are the various factors that are driving the flows.
Kamal Bhatia: So, Tom, I think Pat covered it well. The only other data point I'd add for you is what you asked about NCF. From where we sit in asset management, I think we are managing the whole business for revenue and margin as well. It's critical, as you know; we have a very large book of business across retirement, wealth, and institutional. And as you'll see in our stable fee rate, both in 4Q, we are acutely focused on retention. But as Pat mentioned and I mentioned earlier, we do see growth in our institutional segment. So, I think, as we have guided in Deanna's comments, I think we are looking at stable margin guidance at this stage, where we obviously make sure our expenses are in line with our revenue. And we've also given some revenue guidance. But those are the measures we are looking at in addition to NCF. Chris, any color?
Jimmy Bhullar: To what extent is it environmental verses maybe company specific.
Jimmy Bhullar: And you could talk about 23, and the fourth quarter as well.
Speaker Change: Yes, I mean I think.
Speaker Change: I think what I'd say is pretty.
Speaker Change: So you've talked on.
Speaker Change: <unk> is about.
Speaker Change: The competitive environment remains competitive on flows we've also talked about us wanting to make sure that we have the right plans.
Speaker Change: That we have in our portfolio and are very focused on making sure that we have profitable plan. So I think you've seen in the past year and a half two years.
Speaker Change: We've had some large plans leave that have had very negligible impact on net revenue.
Speaker Change: So again, our focus is on revenue not flows and it will remain that way as.
As we go in the flows is an important measure for us to look at.
Kamal Bhatia: Yeah, I think from an RAS perspective, you know, Tom, it's very difficult to project net cash flows for four years. As you know, we see a lot of seasonality in the fourth quarter and a lot of activity for plan transitions and lineup changes. I think what I'd also reiterate is what we've said before, which is net cash flow is just one measure to look at, and not all net cash flow is not created equal. And we're really focused on increasing revenue, and the profitable growth in our book is really where we're focused.
Speaker Change: But we're trying to remain disciplined in the business that we put on and again I would also say the fourth quarter is historically a negative quarter as we look into 'twenty four in the first quarter particular, we see positive net cash flow in the first quarter and significantly above last year's first quarter. So again.
Speaker Change: We're watching flows it's an important dynamic for us, but we're really really focused on finding all the ways that we can generate revenue across our platform as well as focusing on those plans that are healthy and profitable for us to continue to maintain.
Chris: And I think you'll see our results and the guidance for 24 are very consistent with that approach to managing the business. What I would say is, you know, we're going to continue to remain disciplined on the pricing. We're going to drive more revenue.
Speaker Change: Okay and then just for maybe then on there's been a lot of noise about pension reform reform in Chile, and nothing concrete to actually happened yet, but what are your views on the most likely outcome and how does it impact the principal business.
Chris: And as we look towards 24, we see continued strong transfer deposits. We see solid recurring deposit growth, and we see a moderation in the contract lapse rate, all of which is leading to that revenue guidance at or above our long-term range and margin at the upper end of our long-term range. So that's how I'd respond to the question, Tom. Thanks for the question, Tom. Okay, thanks.
Speaker Change: Yes, I appreciate that and just to pile on.
Speaker Change: <unk> response, there don't discount the value creation of what Krishna.
Speaker Change: We have done around improving the customer experience continuing to build out total retirement solutions, our ability to gather assets for the asset management part of the organization and feed the rest of the organization. So from our perspective, it's a very valuable franchise and currency. This team had done an excellent job ensuring that the bill.
Thomas Gallagher: Our next question is from Jimmy Bhullar with J.P. Morgan. Please proceed with your question. Hi, good morning.
Jimmy Bhullar: Pat, good luck and congratulations on your retirement. I had a question first for Chris on RISP flows. And it's along the lines that you've discussed in response to other questions as well. But if you think about it, the environment overall for retirement plans should be pretty good with the tight labor market and strong GDP growth. And yet, your flows have been negative each of the last two years and each of the last three quarters. So I think some of it is the wealth lapses. Some of it, it seems like from your comments that you're implying that the market's competitive and you're trying to stay disciplined on price. So if you could just give us some detail on what are the various factors that are driving weak flows and to what extent is it environmental versus maybe company specific? And you could talk about 23 and the fourth quarter as well.
Speaker Change: We serve is profitable business, we don't need practice and recordkeeping, so with that as it relates to Chile. As you know this has been an ongoing reform discussion that's been going on for years. The constitutional reform was not successful one of the outcomes of that was further conversations around pension reform and we start.
Speaker Change: Art was doing what's in the best interest of Chilean people and right now what they tell us.
Speaker Change: Through surveys and feedback is they want a choice in their provider they want choice and investment options and this has been very consistent so in fact effectively chileans have rejected the idea of a state owned AFP.
Chris: Yeah, I mean, I think what I'd say is that we've previously talked on calls about the competitive environment remaining competitive on flows. We've also talked about us wanting to make sure that we have the right plans that we have in our portfolio and are very focused on making sure that we have profitable plans. I think you've seen in the past year and a half, two years, we've had some large plans leave that have had a very negligible impact on net revenue. And so, again, our focus is on revenue, not flows, and it will remain that way as we go. Flows is an important measure for us to look at, but we're trying to remain disciplined in the business that we put on. And again, I'd also say, you know, the fourth quarter is historically a negative quarter.
Speaker Change: Providing more value than what the private sector and so we continue to be very vigilant working with regulators working with legislators and continuing work in the industry to make sure that what is available in the AFP is competitive.
Speaker Change: From a fee perspective, the investment options, which it is and to continue to serve the best interest of Chileans, but again, we feel reasonably confident on the industry's ability to demonstrate that and make our case too.
Speaker Change: To elected officials appreciate the question.
Speaker Change: Thanks.
Our next question is from Alex Scott with Goldman Sachs. Please proceed with your question.
Alex Scott: Hey, good morning.
Alex Scott: First question I had was on <unk>.
Alex Scott: And then just wanted to see if you could provide maybe just high level commentary on the competitive environment.
Chris: As we look into 24, in particular, we see positive net cash flow in the first quarter, and significantly above last year's first quarter. So, again, we're watching flows. It's an important dynamic for us, but we're really, really focused on finding all the ways that we can generate revenue across our platform, as well as focusing on those plans that are healthy and profitable for us to continue to be. Okay, and then, maybe Dan on, there's been a lot of noise about pension reform in Chile, but nothing concrete has actually happened yet. But what are your views on the most likely outcome? And how does it impact a principal's business?
Alex Scott: Yes, I think a little bit more of the business sort of go through a renewal or towards the end of the year or beginning of the year just disinterested in how that's gone and you know if there's any pricing considerations that we should think through as we're looking at the net revenue guidance and thinking through.
Alex Scott: Revenue in <unk>.
Alex Scott: Chris.
Chris: Yes, Thanks for question.
Chris: Again, we feel really good about the position of that business is in.
Chris: And all of those competitive pressures are built into our guidance it still shows us.
Benefiting.
Chris: From both the macroeconomic environment as well as the growth in our block and the increase in revenue generation across our block. So yes, we are seeing a competitive environment.
Daniel Joseph Houston: Yeah, appreciate that. And just to pile on Chris's response there, don't discount the value creation of what Chris and his team have done around improving the customer experience, continuing to build out total retirement solutions, and our ability to gather assets for the asset management part of the organization and feed the rest of the organization. So from our perspective, it's a very valuable franchise, and Chris and his team have done an excellent job ensuring that the business we serve is a profitable business; we don't need practice and record keeping. As for Chile, you know, this is an ongoing reform discussion that's been going on for years. The constitutional reform was not successful.
Chris: That's going to continue but we've been able to really.
Chris: Succeed despite that competition Nwf's RF sales were up 14% for the year.
Chris: Fee based transfer deposits were up 17% on a trailing 12 month basis, we had really really strong revenue retention this year.
Chris: And so overall, we feel really good about the underlying business fundamentals and our ability to compete and win clients from from other providers. So.
Chris: Feel really good about where we sit.
Chris: In the market.
Chris: Yeah.
Speaker Change: That's helpful. Thank you.
Speaker Change: Mexico is on the commercial mortgage loan portfolio.
Daniel Joseph Houston: One of the outcomes of that was further conversations around pension reform, and we start with doing what's in the best interest of the Chilean people. And right now, what they tell us, and through surveys and feedback, is that they want a choice in their provider; they want choice and investment options. And this has been very consistent. So, in fact, effectively, Chileans have rejected the idea of a state-owned AFP providing more value than what the private sector has.
Speaker Change: Was just interested if you could talk about maturities you have this year I know you gave some numbers moved acts I'd just be interested in color around how that's going and working through those maturities.
Speaker Change: And if there's anything we should think about as it relates to the I guess it was around 7% of the office portfolio, that's getting closer to 100, LTV with with debt service coverage under 100 versus hard under one.
Speaker Change: There was a fitting way to in this call and have it go to the one person retiring.
Daniel Joseph Houston: So we continue to be very vigilant, working with regulators, working with legislators, and continuing to work in the industry to make sure that what is available in the AFP is competitive, from a fee perspective, and the investment options, which it is, and continue to serve the best interests of us Chileans. But again, we feel reasonably confident in the industry's ability to demonstrate that and make our case to elected officials. I appreciate the question. Our next question is from Alex Scott with Goldman Sachs. Please contribute your question. Hey, good morning.
Speaker Change: Probably the most knowledgeable and deep knowledge of any person I know around commercial real estate is passed so Pat can you provide us with your insights on this yes. Thanks for the question, Alex Obviously real estate and office in particular I was under the radar screen.
Speaker Change: And we are absolutely laser focus on our portfolio and ensuring its that's.
Speaker Change: That's been value, it's being underwritten and it's being monitored and managed appropriately just a level set a little bit Alex we have about $3 billion remaining in our overall commercial mortgage loan portfolio. That's in office.
Alex Scott: The first question I had was on RAS, and I just wanted to see if you could provide maybe just high-level commentary on the competitive environment. You know, I think a little bit more of the business sort of goes through a renewal towards the end of the year and the beginning of the year, and I'm just interested in how that's gone and, you know, if there's any pricing considerations that we should think through as we're, you know, looking at the net revenue guidance and thinking through, you know, revenue in one queue. Bruce.
Speaker Change: High quality office class, a predominantly 60% loan to value and then office portfolio, that's about a 30% reduction already in valuations as you know, we appraise, Indiana highlighted earlier, we appraise our office portfolio on a quarterly basis. So that's a current loan to value to point in time, two six times debt service coverage.
Chris: Yeah, thanks for the question. You know, again, we feel really good about the position our business is in. And all of those competitive pressures are built into our guidance. It still shows us, you know, benefiting from both the macroeconomic environment, as well as the growth in our block and the increase in revenue generation across our block. So we are seeing a competitive environment, and I think that's going to continue.
Speaker Change: That portfolio is 89% occupied currently.
Speaker Change: Specifically to your question of Alex we have leather.
Speaker Change: The loans that are maturing in 2024, and they're in the office category and as highlighted earlier one of those loans already has paid off but we really are going into that portfolio with a very strong position of the remaining 10 loans, 66% loan to value, but what I really want to highlight three things. One is the debt service coverage ratio, which is three.
Chris: But we've been able to really, you know, succeed despite that competition. I mean, WSRF sales were up 14% for the year, and eBay's transfer deposits were up 17% on a trailing 12-month basis.
Speaker Change: Eight.
Speaker Change: Secondly, it's 94% occupied in terms of that portfolio and thirdly as a lease term is five six years remaining that office portfolio. So that $440 million remaining that is expected to mature for the remaining part of 2020 for three of those loans are under $6 million in.
Chris: We had really, really strong revenue retention this year. And so overall, we feel really good about the underlying business fundamentals and our ability to compete and win clients from other providers. So I feel really good about where we stand in the market. Thank you. The next one I have for you is on the commercial mortgage loan portfolio. I was just interested if you could talk about the maturities you have this year. I know you gave some numbers in the deck, so I'd just be interested in color around how that's going, working through those maturities.
Speaker Change: Loan loan balance that remains seven loans.
Speaker Change: So I think Dan highlighted 80% of those loans are going to be maturing in the second half of the year.
Speaker Change: As I mentioned, we do intensive underwriting each one of those loans are those seven loans, we don't see any sort of issues at this point in time relative to any credit losses, and they are all current and pain.
Alex Scott: And if there's anything we should think about as it relates to the – I guess it was around 7 percent of the office portfolio that's getting closer to 100 LTV with debt service coverage under, Sorry, under one. There was a fitting way to end this call and have it go to the one person retiring who has probably the most knowledge of any person I know around commercial real estate. It's Pat.
Speaker Change: A lot of institutional investors and some of those loans again high quality loan portfolio and with the sort of going in debt service coverage ratios occupancy and the long term leases still remaining of that overall portfolio.
Pat: So Pat, can you provide us with your insights on this one? Yeah, thanks for the question, Alex. Obviously, real estate and office in particular is under the radar screen, and we are absolutely laser focused on our portfolio and ensuring it's being valued, it's being underwritten, and it's being monitored and managed appropriately. Just to level the playing field a little bit, Alex, we have about $3 billion remaining in our overall commercial mortgage loan portfolio that's in office. High quality office, Class A predominantly, 60% loan to value, and then office portfolio, that's with a 30% reduction already in valuations. As you know, we appraise, and Deanna highlighted this earlier, we appraise our office portfolio on a quarterly basis. So that's a current loan to value, 2.6 times debt service coverage, and that portfolio is 89% occupied currently. Specifically to your question, Alex, we have 11 loans that are maturing in 2024 in the office category, and as highlighted earlier, one of those loans has already been paid off.
Speaker Change: Continuing to see feel fairly good about the portfolio as we move it forward into the year, we will continue to monitor that very closely.
Speaker Change: And you highlighted Alex was that there are I think we can provide that in the deck.
Speaker Change: A small portion of our overall portfolio.
Speaker Change: One 5% of our portfolio about six months of the offspring for about $200 million that equates to about $200 million. That's in four loans, we continue to monitor those very very carefully.
Speaker Change: We see probably one stress point in one of those loans today.
Speaker Change: So we could see a minor loss reserve on those loans as we look forward into next quarter.
Speaker Change: But that's all we see at this point in time, but we'll continue to monitor those loans also but the portfolio is in a very good place and it's been a good shape right now, but clearly we have to be respectful of the challenges in the marketplace and the liquidity and the headwinds that continue to remain probably for the next couple of quarters. Thanks for the questions Alex.
Pat: But we really are going into that portfolio with a very strong position. The remaining 10 loans have a 66% loan to value, but what I really want to highlight are three things. One is the debt service coverage ratio, which is 3.8. Secondly, it's 94% occupied in terms of that portfolio, and thirdly, the lease term is 5.6 years remaining in that office portfolio.
Speaker Change: Thanks.
Speaker Change: Thank you. Our last question is from Josh Shanker with Bank of America. Please proceed with your question.
Josh Shanker: Yes, Thanks for fitting me in I guess, one for Amy.
Josh Shanker: Looking at the long term guidance range around the better.
Josh Shanker: Medical benefit ratio around 60% to 65% you guys did 61 this year.
Pat: So that $440 million remaining, that is expected to mature for the remaining part of 2024. Three of those loans are under $6 million in loan balance, so that remains seven loans, which, as I think Deanna highlighted, 80% of those loans are going to be maturing in the second half of the year. As I mentioned, we do intend to underwrite each one of those loans. Of those seven loans, we don't see any sort of issues at this point in time relative to any credit losses, and they are all current and paying.
Josh Shanker: A lot of other companies in the space are reporting a much wider variance from the long term.
Josh Shanker: Expected average.
Josh Shanker: Six midpoint of the range I just wanted to ask are not that far away right. Now is a dental providing some sort of balance that's more normal compared to some other things or should we should we think that there is.
Josh Shanker: Something different in the portfolio at principal that's basically coffees, we normally good results as opposed to usually outsized results and the benefits.
Pat: We have a lot of institutional investors in some of those loans. Again, a high-quality loan portfolio, and with the sort of going in debt service coverage ratios occupancy and the long-term leases still remaining in that overall portfolio, we continue to feel fairly good about the portfolio. As we move it forward into the year, we'll continue to monitor that very closely. The last thing you highlighted, Alex, was there are, I think we provided in the deck, a small portion of our overall portfolio. I think it's about 1.5% of the overall portfolio, about 6.7% of the office portfolio, so about $200 million. It equates to about $200 million.
Speaker Change: Yeah, Yeah, you've hit it right in mentioning dental and a lot of the other when I look across the industry a lot of the other changes that I'm seeing happen with portfolios that are either primarily or solely kind of that life and disability portfolio and again when I look across our results for life and disability.
Speaker Change: I feel really comfortable that we're setting ourselves up with the loss ratio range, that's going to give us both the right appropriate growth prospects and profitability dental does have at it.
Speaker Change: More highly utilized product it does tend to have a different rhythm to the business I think the great news there is that third and fourth quarter. We continued to see a moderation of that loss ratio for us. So we're seeing sort of heading back into more normal cycles for dental and that does fuel some of our confidence.
Pat: That's in four loans. We continue to monitor those very, very carefully. We see probably one stress point in one of those loans today, so we could see a minor loss reserve on one of those loans as we look forward to the next quarter, but that's all we see at this point in time, but we'll continue to monitor those loans also. The portfolio is in a very good place. It's in good shape right now, but clearly, we have to be respectful of the challenges in the marketplace and the liquidity and the headwinds that will probably remain for the next couple quarters. Thanks for the questions, Alex. Thanks. Thank you. Our last question is from Josh Shanker with Bank of America. Please proceed with your question. Yeah, thanks for fitting me in. I guess this one's for Amy. Looking at the long-term guidance range around the medical benefit ratio of around 60 to 65%, you guys did 61 this year.
Speaker Change: In the ranges that we're that we're giving now what I would say is I just reiterate that Deanna mentioned in her earlier comments, we do expect 2020 for loss ratios to be in that lower end of the range. So I feel really good about those comments and the beginning of the year experience on those products, but look strong.
Speaker Change: And is that the lower end life and disability driven or it's the whole kitten caboodle is going to be up.
Speaker Change: At the lower end.
Speaker Change: Well if you use your technical term the whole kitten caboodle is going to be at the lower end. So that's that.
Speaker Change: That is a full portfolio comments that I'm, giving you.
Josh Shanker: A lot of other companies in the space are reporting a much wider variance from the long-term expected average. You're not that far away right now. Is dental providing some sort of balance that's more normal compared to some other things? Or should we think that there's something different in the portfolio at principal that's basically causing the normally good results as opposed to unusually outsized results in, Yeah, you've hit it right in mentioning dental. A lot of the other changes that I'm seeing happen are with portfolios that are either primarily or solely kind of that life and disability portfolio. And again, when I look across our results for life and disability, I feel really comfortable that we're setting ourselves up with a loss ratio range that's going to give us both the right appropriate growth prospects and profitability. Dental does have, it's a more highly utilized product.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: I appreciate that question Josh.
Speaker Change: Thank you we have reached the end of our question and answer session. Mr. Houston Your closing comments. Please.
Houston: Okay appreciate that and thank you for your time today on the call as you can tell we're very confident about our go forward strategy and the value, we're able to create for our customers and our shareholders. Once again Pat. Thank you for your service you may have a significant contribution you've made a significant contribution to the company's success in the corner for our customers.
Speaker Change: For that we're quite grateful will that have a great day. Thank you for taking the time to be part of this call.
Speaker Change: Okay.
Speaker Change: Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.
Speaker Change: Yes.
Speaker Change: [music].
Amy C. Friedrich: It does tend to have a different rhythm to the business. I think the great news there is that in the third and fourth quarters, we continue to see a moderation of that loss ratio for us. So we're sort of heading back into more normal cycles for dental, and that does fuel some of our confidence in the ranges that we're giving. Now, what I would say is I just reiterate what Deanna mentioned in her earlier comments: we do expect 2024 loss ratios to be in that lower end of the range. So I feel really good about those comments, and the beginning of the year experience on those products looks strong. And is that lower end life and disability driven, or is the whole kit and caboodle going to be at the lower end? Well, to use your technical term, the whole kit and caboodle is going to be at the lower end.
Amy C. Friedrich: So that is a full portfolio comment that I'm giving you. Okay. Thank you. I appreciate that question, Josh.
Daniel Joseph Houston: Thank you. We have reached the end of our question and answer session. Mr. Houston, your closing comments, please.
Daniel Joseph Houston: I appreciate that. And thank you for your time today on the call. As you can tell, we're very confident about our go forward strategy and the value we're able to create for our customers and our shareholders.
Daniel Joseph Houston: Once again, Pat, thank you for your 40 years of service. You've made a significant contribution to the company's success and to our customers. And for that, we're quite grateful.
Operator: With that, have a great day. Thank you for taking the time to be part of this call. Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.