The Principal Financial Group is holding a conference call to discuss their fourth quarter and fourth year 2023 financial results and 2024 outlook. The call will include a question-and-answer period and will be led by CEO Dan Houston and CFO Deanna Strable. The company's materials and safe harbor provision can be found on their website. The call may contain forward-looking statements and non-GAAP financial measures. The company will also be hosting an Investor Day in November.

In the fourth quarter and full year of 2023, Principal delivered strong results despite challenges such as geopolitical events and inflation. Non-GAAP operating earnings were $1.6 billion for the full year and $441 million for the fourth quarter. The company's diversified and integrated business model proved resilient, resulting in a 6% increase in earnings per share. They also returned over $1.3 billion of capital to shareholders and reported $695 billion of total company managed AUM.

In the fourth quarter, the company generated a positive $350 million in PGI institutional net cash flow, driven by real estate and fixed income flows. Retail net cash flow remains challenging, but the company has benefited from diversification of distribution channels. Their organic growth rate has proven to be more resilient compared to their active management peers. As interest rates decrease, the company is well positioned with the right strategies. They have a strong pipeline of real estate mandates and are growing their in-house capabilities. Investment performance has improved significantly and they are focused on consistently strong long-term performance. In Principal International, they ended the quarter with a record $180 billion in total reported AUM.

The increase in revenue for Principal was due to a combination of market performance, foreign exchange tailwinds, and positive cash flows in Latin America and Asia. The company has confidence in the long-term potential of the Asian market and has welcomed a new President for Latin America. In the U.S. Retirement sector, the company saw strong growth in revenue and earnings, driven by increased transfer deposits and sales. The company also saw growth in recurring deposits, particularly in the small and medium-sized business segment. While plan lapses moderated, participant withdrawals increased. Overall, there was a significant improvement in account value net cash flow compared to the previous year. RIS sales also increased, driven by fee-based transfer deposits and pension risk transfer sales.

The company has a strong market position and a full range of retirement and workplace solutions, leading to positive momentum heading into 2024. Sales and retention are strong in the Specialty Benefits sector, and the company is confident in its ability to serve underpenetrated segments in the SMB market. The Life sector also saw growth, particularly in the business market segment. The company's focus on higher growth markets and partnerships will continue to create value for customers and shareholders. The company has received numerous awards and recognition, including being named a Best Place to Work in Money Management for the 12th consecutive year.

The article discusses the recognition received by the company, the retirement of the President of Principal Asset Management, and the appointment of a new President. The company has seen growth and diversification under the guidance of the former President. The article also mentions the financial performance for the quarter and full year, updates on the investment portfolio, and the outlook for the upcoming year.

The impact of credit drift and losses on the company's capital and free cash flow is minimal and can vary greatly from quarter to quarter. The full year non-GAAP operating earnings increased by 6% and exceeded expectations, with a significant positive impact in the fourth quarter. The S&P 500 performed well in the fourth quarter, outperforming other equities and fixed income. Margins remained strong as the company reduced expenses and invested for growth. Despite elevated severance expenses, compensation and other expenses only modestly increased over the previous year.

The company's business units performed well in the fourth quarter and met or exceeded their 2023 guidance ranges. RIS saw a 22% increase in pre-tax operating earnings due to growth and favorable market conditions. PGI's pre-tax margin was strong at 35% and revenue growth was slightly below expectations. Performance fees were in line with outlook despite a pressured real estate market. Principal International had a strong year with revenue growth of 9% and a 32% margin. Specialty Benefits also performed well, with a 9% growth in premium and fees, a 15% margin, and a 17% increase in pre-tax operating earnings. This was driven by record sales, strong retention, and favorable market conditions.

The company's metrics for specialty benefits were within their guided ranges, with growth in premium and fees in the Life sector. Margin was slightly below their guided range due to lower net investment income. The company's investment portfolio remains high quality and well-positioned for various economic conditions. They revalued their office real estate portfolio quarterly in 2023 and the commercial mortgage loan portfolio remains healthy. In 2023, 10 office loans matured and were paid off without any extensions or foreclosures. The company ended the year with strong capital and liquidity, with $1.7 billion in excess and available capital, above their targeted level.

In the fourth quarter, our company took actions to increase capital efficiency, resulting in over $200 million in freed up capital. We also returned $1.3 billion to shareholders in 2023 and announced a $0.69 common stock dividend payable in the first quarter. Our outlook for 2024 includes 9% to 12% growth in earnings per share and 75% to 85% free capital flow conversion. Despite pressure on real estate and Asia, we expect to achieve our targeted return on equity range in 2025.

In 2024, the company plans to return excess capital to shareholders through share repurchases and a 40% dividend payout ratio. They have a new share repurchase authorization for $1.5 billion and their portfolio is heavily weighted towards real estate. The company expects continued pressure on prepayment fees and real estate returns. They also provided guidance for their business units, with RIS expected to have high revenue growth and margin, PGI expected to have lower revenue growth due to market pressures, and Principal International expected to have in-line margin and low single-digit revenue growth due to foreign currency translation and macro headwinds in Asia.

The closure of guaranteed retirement products in Asia will affect revenue and earnings, but Latin America is expected to continue delivering strong earnings growth. Favorable loss ratios are expected in benefits and protection, and the margin for life insurance is expected to improve. The first quarter is typically the lowest for earnings due to deferred compensation and elevated payroll taxes, and dental claims are higher in the first half of the year. The company has a strong capital position and is focused on long-term financial targets. The first question is about the outlook for net revenue in PGI, with the company expecting to be at the low end despite market tailwinds due to real estate headwinds. The question asks about the expectation for real estate-related activities in 2024 compared to 2023.

Patrick Halter and Kamal Bhatia of PFG discuss the company's outlook for the year, expressing cautious optimism about flows and noting an increase in investors moving into riskier investments. They also mention a strong real estate pipeline and potential opportunities in private debt.

The company has a strong legacy in both debt and equity operations, but is also seeing growth in real estate and specialty fixed income. Clients are looking for more diversification and the company's strength in small and mid-cap equities is gaining interest. The retirement of Pat is mentioned and the discussion shifts to pension risk transfer, which saw a strong quarter and year overall. The PRT business is a strong contributor to profitability and growth for the company.

The company took advantage of capital and onboarding constraints in the PRT market, resulting in strong sales and returns. They expect to see continued growth in the PRT market in 2024 and are focused on maximizing returns rather than overall premiums. They also see potential in their newly opened Bermuda market for capital efficiency.

Principal has decided to exit a legacy guaranteed product in Hong Kong due to its high capital requirements and low return profile. This decision will have a positive impact on capital, but will also result in a decrease in revenue and operating earnings in 2024, with an estimated pressure of $10 million on pre-tax Hong Kong earnings. Approximately $200 million of the $1 billion AUM in this product will leave Principal, with the remaining $800 million to $900 million being retained in other asset classes.

The company has set up a new entity in Bermuda to create value for customers and shareholders. The focus of this entity is to support the PRT and term life insurance business and generate new sales. Some existing business has already been transferred to this entity, resulting in a $200 million increase in free capital flow in the fourth quarter.

The company plans to use its capital for new sales in 2024, but may consider other uses. There has been a slight increase in participant withdrawals due to retirements, but overall, the company is seeing healthy growth in deferrals and matches. The company's 401(k) plans are institutionally priced and offer attractive investment options.

The speaker discusses the option of leaving money in a retirement plan and the company's efforts to retain assets. They also mention the severance expenses, which are spread across the organization, and the company's focus on aligning expenses with revenues. The speaker then addresses a question about the potential for growth in supplemental voluntary products and hands it over to Amy to discuss the company's opportunities and product development pipeline for benefits.

The Principal Well-Being Index conducted in November showed that small and mid-sized businesses have a positive outlook on their financial situation, with 65% feeling favorable and 73% believing it will continue to improve. These businesses are also interested in offering supplemental products such as critical illness, accidents, and hospital indemnity to attract and retain talent. These products are seen as a complement to core coverages and are expected to see growth of 15-20%.

The speaker is discussing the importance of having financial security in place in order to participate in other programs, such as saving in a 401(k) or investing. They mention that if these products are in place, it increases the ability to extend to other products offered by Principal. In response to a question about alternative returns, the speaker clarifies that their long-term expectation is in line with their current assumption, but if current conditions persist, it may come in below that. They also provide some numbers and a breakdown of their alternative portfolio.

The company is unable to predict future performance accurately and has provided guidance on a run rate basis. The alt portfolio is heavily concentrated in real estate and performed below expectations in 2023. Private equity and hedge funds performed better than expected. Pre-pays and real estate transactions are expected to be below expectations, but if BII is at the same level as 2023, reported EPS would be in the 9-12% growth range. The company is seeing improvement from 2023 in terms of net flows in RIS and PGI.

Kamal and Pat discuss the improvements in their investment activities, specifically in fixed income and real estate. They mention the potential impact of the Fed's policy actions and their focus on retaining clients. They also highlight the strong interest in equity activity, particularly in small and midcap companies. Kamal adds that they are managing the business for revenue and margin, with a focus on retention and stable margins. They have also given revenue guidance for the future.

In response to a question about net cash flow, Dan Houston and Chris Littlefield discuss the measures they are taking in addition to NCF. Littlefield notes that it is difficult to project net cash flow for the full year due to seasonality and changes in plans. He emphasizes that not all net cash flow is equal and the company is focused on increasing revenue and profitable growth. They plan to remain disciplined on pricing and expect strong transfer deposits, recurring deposit growth, and a moderation in contract lapse rate. A question is then asked about RIS fee flows, and Littlefield explains that despite a favorable environment for retirement plans, their flows have been negative in recent years and quarters.

The speaker discusses the various factors driving weak flows, including the competitive environment and the company's focus on profitable plans. They also mention the historically negative fourth quarter and anticipate positive net cash flow in the first quarter of 2024. The other speaker asks about the potential impact of pension reform in Chile on the company's business.

The speaker emphasizes the value created by Chris and his team in improving customer experience and building out total retirement solutions. They also mention the ongoing pension reform in Chile and the desire for choice among providers and investment options among Chileans. They feel confident in the industry's ability to make their case to elected officials. The next question is about the competitive environment for RIS.

The speaker asks about the business's renewal at the end of the year and any pricing considerations. The response is positive, stating that the business is in a good position despite competition. The speaker then asks about the commercial mortgage loan portfolio and its maturities. The response is that the company feels good about the portfolio and its ability to compete. The speaker then directs the question to Pat, who has extensive knowledge of commercial real estate.

The speaker responds to a question about the company's commercial mortgage loan portfolio, specifically in the office category. They state that there is currently $3 billion remaining in the portfolio, with a 30% reduction in valuations. They mention that they appraise the portfolio quarterly and highlight some key metrics such as loan-to-value, debt service coverage, and occupancy. They also mention that there are 11 loans maturing in 2024, with one already paid off. The remaining 10 loans have a 66% loan-to-value and strong debt service coverage and occupancy rates. The speaker states that they do not foresee any credit losses for these loans and that they are all current and paying.

The company's loan portfolio is of high quality with good debt service coverage ratio, occupancy and long-term leases remaining. They are monitoring a small portion of the portfolio closely and may see a minor loss reserve in one loan. The portfolio is in good shape, but they are aware of challenges in the market. The medical benefit ratio for this year was 61%, falling within the long-term guidance range of 60% to 65%, which is not far from the midpoint of the range. Other companies in the industry are reporting a wider variance from their expected average.

The speaker is discussing the performance of Principal's dental portfolio and how it compares to other products in their portfolio. They mention that dental is a highly utilized product and has a different rhythm to the business, but they are seeing a moderation in the loss ratio for the third and fourth quarter. They also mention that the overall portfolio is expected to have a lower end loss ratio in 2024. The speaker concludes by saying that they feel confident about the performance of their products.

The speaker thanks the person they were speaking to for their time and expresses confidence in their company's strategy. They also thank someone named Pat for their 40 years of service and acknowledge their significant contribution to the company's success. The speaker ends the call and the operator concludes the conference call.

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