The operator introduces the Principal Financial Group Third Quarter 2023 Financial Results Conference Call and provides instructions for the question-and-answer period. Humphrey Lee, Vice President of Investor Relations, is the moderator for the call. The CEO, Dan Houston, and CFO, Deanna Strable, will deliver prepared remarks, followed by a Q&A session with other members of senior management. The call may contain forward-looking statements and references to non-GAAP financial measures. The company will hold a combined fourth quarter 2023 earnings and 2024 outlook call in February.

Dan Houston, the CEO of the company, begins by welcoming everyone and sharing key aspects of their third quarter financial results. He mentions the strong quarter driven by healthy sales growth and strong underwriting results. He also highlights their balanced approach of investing for growth while managing expenses. The company's integrated business model and partnerships continue to create value for customers and shareholders. They have also returned over $350 million to shareholders through share repurchases and dividends. However, the equity markets and foreign currency fluctuations have impacted their total managed assets.

The company's total managed net cash flow improved in the third quarter due to strong flows in Principal International and improved institutional flows in Principal global investors. Despite market volatility, the company is well positioned and has the right strategies in place for when interest rates stabilize and investors reallocate back into risk-based assets. The company also saw positive real estate net cash flow in the quarter, with several opportunities expected to boost optimism for the coming quarters. However, the company is aware of two large institutional outflows that will impact net cash flow by approximately $5 billion in total.

In the fourth quarter and early first quarter of 2024, Principal International expects two outflows. They ended the quarter with $168 billion in total reported AUM, driven by strong retirement net cash flow in Latin America. They have confidence in the global asset management opportunity and have added two new investment leaders. They also plan to announce a new leader for Latin America. In US Retirement, account value net cash flow was positive in the third quarter, with sales and recurring deposits increasing. However, sales and lapses in the large plan segment can impact net cash flow significantly quarter-to-quarter.

In the third quarter of 2022, the company saw a decrease in deposits due to plan lapses and lower defined benefit plan deposits. However, the SMB segment remained strong and is expected to continue to grow in the fourth quarter and into 2024. The company is focused on driving profitable growth in RIS and Specialty Benefits, as well as targeting underpenetrated segments in the SMB market. In Life, the company's strategy has resulted in a 24% growth in premium and fees. Overall, the company is confident in its ability to provide financial tools and products to meet the demand for knowledge and support in the market.

The company regularly assesses the state of financial inclusion worldwide and recognizes the need for collaboration to improve access to financial services. They have received recognition for their efforts and have reported a net income of $1.2 billion in the third quarter, with the majority coming from exited businesses. Excluding this income, net income was $544 million with minimal credit losses.

The company had minimal impacts from credit drift in the third quarter, with total credit drift and losses of $41 million year-to-date. Excluding significant variances, third quarter non-GAAP operating earnings increased by 14% over the previous year, demonstrating the strength of the company's business model. Significant variances had a net positive impact of $40 million pre-tax, but a net negative impact of $27 million after-tax and $0.11 per diluted share. These variances were mainly due to an actuarial assumption review and lower-than-expected variable investment income in certain areas of the company. The assumption review had a net positive impact of $63 million pre-tax, but a negative after-tax impact of $6 million due to a one-time tax impact. The company's pre-tax operating earnings for RIS and Life reflect the run rate impacts from the assumption review, with no material impacts in Specialty Benefits. Overall, variable investment income was positive for the quarter but lower than expected.

In the third quarter, VII saw improvements in real estate sales and alternative investment returns, but prepayment fees had little impact. The S&P 500 daily average increased, benefiting fee-based businesses, but markets retreated in the second half of the quarter. Foreign exchange rates were a slight headwind. RIS and PGI saw increases in net revenue and strong margins, while Specialty Benefits had a 32% increase in pre-tax operating earnings. The fourth quarter is expected to have higher expenses, but VII is focused on managing expenses in the current macro environment.

The company's investment portfolio remains strong and well-matched with their liabilities. They have revalued their office real estate portfolio and have a healthy commercial mortgage loan portfolio. They are confident in resolving all remaining office loan maturities in the fourth quarter and have strong metrics for 2024 maturities. The company has a strong capital and liquidity position, with excess and available capital of $1.4 billion. They have returned over $350 million to shareholders in the third quarter and have announced a $0.67 common stock dividend for the fourth quarter. They are increasing their full year share repurchase expectation to $700 million and expect to return a total of $1.3 billion of capital to shareholders for the full year.

The company remains focused on maintaining its capital and liquidity targets and will continue to deploy capital in a balanced and disciplined manner. They are committed to maximizing growth drivers and delivering long-term shareholder value. The call is now open for questions, and the first question is about real estate. The company had $800 million in real estate flows in the quarter and expects to see similar levels in the future. They have a pipeline of $6 billion in committed capital to invest in the future.

In the fourth quarter, real estate net cash flow is expected to remain consistent with the third quarter. There will be two large outflows totaling $5 billion in the late fourth quarter and early first quarter of 2024, from a preferred securities mandate and a large-cap equity mandate. The combined earnings loss impact of these two mandates is approximately $10 million. PGIM's performance fees were strong in the third quarter, but there is no indication of any other one-time outflows in 2024.

The speaker is responding to a question about the performance fees for the company, which were surprisingly good despite the current market conditions. They explain that performance fees can be unpredictable and are dependent on market conditions, but they expect them to increase in the future. The speaker also addresses the low net flows in the fee-based business and attributes it to lapses in the large cap sector and potential competition.

Dan Houston thanks Chris for his leadership in advancing the company's domestic retirement strategy and acknowledges the challenges in the current environment. He mentions the focus on small, mid, and large plans and the company's unique TRS solution. Chris responds by mentioning the impact of the pandemic and market volatility on bid activity, but expects a moderation in contract lapses in the future. He also notes positive trends in sales and transfer deposits in the fourth quarter.

In response to a question about the assumption review, Deanna Strable explains that it will have a slight impact on RIS and Life, but no impact on SPB. She also mentions a one-time capital hit and explains that there will be no ongoing tax impact. Suneet Kamath then asks about the strong results in the disability business and how quickly they will be factored into pricing. Amy Friedrich responds that the timing will vary based on the composition of each company's block.

The speaker discusses the reratable nature of their business and how they are committed to passing on good performance to customers through rate adjustments. They also mention the importance of the composition of their block and how it affects their ability to grow.

In response to a question about margins, the operator introduces Alex Scott from Goldman Sachs. Scott asks about the sustainability of margins and the company's ability to maintain them amidst inflation pressures. CEO Dan Houston mentions the company's vigilance in aligning expenses with revenues, while CFO Deanna Strable explains that margins were strong due to market strength in the early part of the year. She also mentions that some market strength retreated in the third and fourth quarters.

The speaker discusses the company's expenses and how they will impact fourth quarter margins. They also mention their focus on maintaining targeted margins and their upcoming outlook call in February. The speaker then addresses the challenges facing the industry, such as geopolitical risk and economic volatility, and how the company is working to resist these pressures through client engagement and offering specialty income capabilities.

The speaker discusses the recent focus on total return solutions by investors, particularly in the early stages of a long cycle. They also mention the success of their real estate franchise and their strong relationships with long-term clients. The speaker expresses confidence in their ability to navigate the current market conditions and highlights their capabilities in both public and private markets. The questioner then asks about the favorable impact of mortality on their pension risk transfer business in the quarter.

During the third quarter, Principal Financial Group experienced a benefit of mortality due to the COVID pandemic. However, the company conducts an annual actuarial review and has found that there is not expected to be significant mortality improvement in the future. This led to a slight benefit in the run rate expectations for AAR and a $50 million benefit in pension risk transfer products. In Specialty Benefits, the adjusted benefit ratio improved by 4 points year-over-year due to outperformance in group disability, but this may not be repeatable in the future.

The speaker discusses the performance of various lines of business, including Group Life, Dental, supplemental health, and individual disability. They mention that Group Life is performing well, while Dental has seen some negative impact due to COVID but is slowly returning to pre-COVID patterns. They also expect consistent performance from supplemental health and individual disability, with potential benefits from recent changes. The speaker also mentions that variable investment income may be lower than normal for the remainder of 2023.

In response to a question about the potential for persisting trends in 2024, Deanna Strable, a representative for the company, stated that the fourth quarter of 2021 may see levels similar to the first and second quarters due to volatile market conditions. She also mentioned that high interest rates could lead to pressure from prepays, and that more details will be provided in the February outlook call. In regards to the Individual Life business, Amy Friedrich, who leads the team, discussed the impact of divested businesses and reinsurance agreements, but noted the success of the business owner executive solutions and NQ business.

The speaker, Dan, discusses the success of their Life business and how it has met or exceeded their expectations in building relationships with business owners. They also mention that there have been some recent issues with mortality, but it is not related to the number of claims, rather the severity of them. The next question is about the expected outflows in the RIS business in the fourth quarter, and the speaker, Chris, states that they anticipate outflows but not as significant as the previous year's $7 billion.

In the third quarter, the company is expecting strong growth in sales and deposits, but also some elevated loss activity. It is difficult to predict the fourth quarter due to plan transitions and lineup changes. However, the company expects it to be less negative than the previous year. They are managing the business for profitable growth and expect to be within their guidance range for revenue and in the upper half of margin for the full year. There may be some fee pressure, but the company is not seeing more than usual.

The speaker explains that the company has benefited from equity markets over the past year, leading to a fee rate of around 40 bps. They expect a 2-3 bps reduction in fees annually due to market dynamics, and this quarter saw a 2 bps reduction. The company is also managing expenses and delivering higher margins. The speaker adds that the shift towards passive investment options may also impact revenues. In response to a question about the company's office CML LTV, another speaker mentions that they review their office portfolio quarterly.

The company has $3.1 billion worth of office properties in their general account, with a 57% loan-to-value, 2.6 times debt service coverage, and 89% occupancy. They regularly analyze the cash flow and value of each property, adjusting their cap rates to reflect market conditions. Their cap rates are significantly conservative compared to the NATREF index. The current loan-to-value for their office portfolio is 57%, not 63%.

The speaker discusses the 24 maturities and notes that even though the loan-to-value ratio is 63%, the debt service coverage is 3.8% and occupancy is at 94%, making these loans attractive. They also mention traditional life and annuity insurers creating side cars in Bermuda to accumulate assets and earn fee income, but the company is exploring alternative options for capital relief and creating value for shareholders.

Principal has recently increased their dividend rate by $0.02 and also plans to increase their buyback expectations by $100 million. This increase in cash flow was unexpected, but Principal plans to continue investing in their fee businesses while also returning capital to shareholders. They are committed to maintaining a 75-85% free cash flow ratio and have paused dividend increases since their strategic review in order to assess the impact on their earnings. The negative market conditions in 2022 also played a role in their decision-making.

The company had a positive impact on free capital flow in the quarter, with two notable one-time events. They plan to increase their common stock dividend, share buyback expectations, and return $1.3 billion to shareholders in 2023. The company expects to see consistent growth in dividends, with 9-12% EPS growth and a commitment to returning growth to shareholders.

In response to a question about the consistency of dividends, Dan Houston, CEO of the company, explains that their diversified model allows for consistent dividends and potential for future increases. He also mentions that there will be a combined earnings call in 2024 and emphasizes the company's focus on aligning expenses with revenues and investing in innovation. Houston remains optimistic about creating value for customers and shareholders.

This summary was generated with AI and may contain some inaccuracies.