The operator introduces the Principal Financial Group Second Quarter 2024 Financial Results Conference Call and mentions that there will be a question-and-answer period after the speakers' prepared remarks. Humphrey Lee, Vice President of Investor Relations, then gives some information about the call, including where materials can be found and a reminder about the company's annual report and non-GAAP financial measures. He also mentions an upcoming Investor Day event. CEO Dan Houston then begins his prepared remarks.

The speaker discusses the company's financial results for the second quarter, including an increase in non-GAAP operating earnings and net revenue. They also mention the mixed market performance and the impact on the company's total managed AUM. The company returned capital to shareholders and raised their common stock dividend. In the retirement sector, recurring deposits increased by 7%.

The company saw growth in recurring deposits and transfer deposits, driven by the SMB market. Contract retention has improved, offsetting elevated participant withdrawals. The company also had strong pension risk transfer sales and acquired Ascensus' ESOP business, solidifying their position as the number one provider in the US. Principal Asset Management also had strong sales in the second quarter.

The company has seen strong demand for their mutual funds and ETFs, particularly in private real estate and specialty fixed-income. They had a net cash flow of $500 million into private real estate, and expect the second half of the year to improve. They have launched new funds and capabilities, and have enhanced their investment performance disclosure. Principal International ended the quarter with $171 billion in AUM, but faced foreign currency headwinds.

The company, Principal, had a slightly positive net cash flow in the second quarter, with strong contributions from Southeast Asia and Hong Kong offsetting small outflows in Latin America. The Benefits and Protection segment saw above-market premium and fee growth, driven by record sales and strong retention. The company's focus on higher-growth markets, integrated product portfolio, and distribution partnerships are expected to continue driving growth. Principal celebrated its 145th anniversary and remains committed to providing financial security to millions of customers. In the second quarter, reported net income was $353 million.

In the second quarter of 2024, net income for the company was $356 million, with minimal credit losses of $25 million. Non-GAAP operating ROE improved by 80 basis points compared to the previous year. Excluding significant variances, non-GAAP operating earnings were $415 million, a 4% increase from the second quarter of 2023. Foreign exchange rates and one-time expenses impacted earnings, but the company remains on track to deliver full-year EPS growth in line with their 2024 guidance. Significant variances for the quarter include lower variable investment income, unfavorable encaje performance, and a small regulatory closed-block dividend adjustment.

In the second quarter, the company's variable investment income improved due to stronger alternative returns. However, real estate transactions were muted and there were no prepayment fees. The non-GAAP operating earnings effective tax rate was higher than expected due to a decrease in the Iowa corporate tax rate, but this will have a long-term benefit. The RIS and PGI business units saw increases in pre-tax operating earnings, while Principal International and Specialty Benefits saw decreases. Overall, the company expects a strong second half of the year.

The company saw continued growth in its business and improved underwriting results, driven by a diverse range of product lines. In the Life Insurance sector, they secured two risk-reducing contracts which had a minimal impact on earnings. Excluding this, premium fees grew 4% in line with guidance. The company also revised its RBC target to a range of 375% to 400% and currently has excess capital of $1.6 billion. They have no immediate plans to lower their RBC level and will operate within this range.

In the second quarter, we returned $415 million to shareholders through share repurchases and dividends. Our year-to-date capital return is nearly $800 million and we expect to meet our targeted free capital flow for the full year. We are committed to returning excess capital to shareholders and expect $1.5 billion to $1.8 billion of capital deployments for the year. Our recent dividend increase reflects our confidence in continued growth and performance. We maintain a balanced and disciplined approach to capital deployment and our investment portfolio is well-positioned for economic conditions. The commercial mortgage loan portfolio remains healthy with only $290 million of maturities remaining. We are confident in our ability to meet our enterprise 2024 targets.

The company expects strong growth in earnings per share, return on equity, and free capital flow conversion. They are confident in their businesses and anticipate acceleration in the second half of the year. The call was opened for questions from investors, and the first question was about the retirement sector's fee revenue, which was slightly lower than expected due to fee rate compression. The company believes that looking at the trailing 12-month fee rate is the best way to evaluate performance, and they attribute the decline to market outperformance and timing of billable services.

The speaker addresses three factors that contribute to the fee-based revenue rate. First, the average asset value increases faster than the numerator due to market outperformance. Second, the market decline in April had a notable impact on monthly average asset value. Third, the equity exposure is more diversified, resulting in less correlation to the S&P 500. The speaker also mentions that the use of guaranteed account products in WSRS is increasing, which may have also affected the fee revenue rate. Overall, the speaker remains confident in their guidance for the full year.

The speaker, Deanna Strable, is addressing a question about the expected increase in earnings per share (EPS) in the second half of the year. She mentions that the company has spent a lot of time analyzing the underlying businesses and is confident in their ability to meet their full year guidance. She also acknowledges that there is a significant increase needed in the second half, but reassures that they would not be reconfirming their outlook if they didn't have the business and financial fundamentals to support it. She clarifies that the numbers should be thought of in the right way.

The speaker is explaining that the company's projected 9% to 12% EPS growth is based on adjusted EPS growth off of an adjusted figure from 2023. They expect an average of slightly over $2 per quarter in the next two quarters, compared to the actual average of $1.76 per quarter in the first half of the year. The seasonality of certain segments and the natural growth of all businesses, as well as reduced share count, will contribute to a higher EPS in the second half of the year. The speaker also points to the pattern of EPS in 2023 as evidence for their confidence in meeting their full year guidance. As long as macro conditions remain favorable, the speaker sees a clear path to achieving their guidance.

During a recent earnings call, a question was asked about the Private Wealth Management Group's (PGI) expenses and why they did not decrease as much as expected in the last quarter. CEO Daniel Houston explained that there were severance costs and investments in the business that needed to be made, especially as they transition from public to private. Kamal Bhatia, the CFO, added that expenses were also elevated due to reinvestments in the business, such as infrastructure debt, and market adjustments. However, he reassured that the company remains confident in their expense management capabilities and provided guidance on margins. Another topic discussed was the $1 billion in sales in pension risk transfer.

The speaker asks about competitors' comments regarding lawsuits against plan sponsors affecting the PRT market. The company responds that they still see the market as robust and have exceeded targeted returns. The next question is about low fee mandates affecting PGI net flows. The company explains that the business they lost may have become low fee mandates over time and that they have different generations of investments. They then provide more detail on the most recent quarter's net cash flows and the low fee nature of those flows.

The company had a significant outflow of $900 million in a low-fee fixed-income mandate, but their durable sources of net cash flow in real estate and private credit remain strong. The recent underperformance of some strategies is being closely monitored and addressed by the team.

The speaker acknowledges the importance of investment performance and states that there is no direct correlation between short-term performance and flows. They provide data on their asset-weighted values and highlight two strong strategies. They also mention that 80% of their strategies are beating their benchmark and their real estate private equity strategy has had positive returns. The speaker feels confident about their performance.

The company is experiencing strong returns on its RIS PRT volume and may shift its focus to this area for business growth. The PRT business has been performing well and is expected to continue doing so in the second half of the year, with the company aiming to achieve its targeted returns. The company prioritizes a balanced approach between growth and return on investment in this area. The company is currently the third largest provider in the industry for PRT.

The company is optimistic about the opportunities in the defined benefit market and their existing capabilities in this area are a differentiator for them. They offer a full suite of solutions for their customers and are able to capture derisking opportunities through PRT. The company's pipeline is primarily in the small to mid-size market and they have better onboarding capabilities than their competitors. They are focused on getting attractive economics rather than solely targeting large and highly competitive plans.

The company has a Bermuda entity that was created for new business, including term life and PRT. Some existing business has also been ceded to this entity. Term life new business has continued to be reinsured to Bermuda, but PRT sales are evaluated on a case-by-case basis to determine if Bermuda is the best option for capital efficiency and operations. None of the first half PRT sales have used Bermuda, but it is expected to be used for some sales in the second half of the year.

Deanna Strable, the CEO, answered a question about expectations for the back half of the year. She mentioned that there has been improvement in the pressured VII metric, but there is still pressure in overall volume of variable investment income. She explained that the improvement in the current quarter was due to the actual return of their alts portfolio, which had previously underperformed. However, there is still pressure in two areas: prepays and real estate transactions. She believes there could be a constructive increase in real estate transactions in the second half of the year, but significant improvement may not occur until 2025.

Dan and Chris discuss the impact of participant withdrawals and 401(k) rollovers on Principal's business. They attribute the elevated level of withdrawals to the strong market performance and the opportunistic nature of advisors. They also mention their efforts to retain assets through their Principal Connection capabilities. Chris adds that they continue to invest in improving their IRA rollover rates. However, they clarify that the rate of withdrawals has only slightly increased.

The speaker explains that the company's recent increase in withdrawals is due to market impact rather than a change in the rate of withdrawals. They also mention that their Principal Financial Network and PGI divisions are benefiting from this trend. When asked about revenue growth in their defined contribution business, they decline to give a specific breakdown but express confidence in their performance.

The speaker believes that their company is growing at or above the industry average in terms of revenue rate. They are looking at their retirement business as a whole and are seeing strong performance in their small to mid-market segment. They have adopted an enterprise strategy to capture profits and revenues across the organization. The questioner asks about planned level retention and whether there were any large case losses this quarter.

Chris and his team have seen significant improvement in contract retention and customer satisfaction since the full integration of the acquisition and the most recent ESOP acquisition. They have also seen positive trends in advisor NPS scores. They feel confident that they have gotten through the volatility from the Wells transaction and have good retention levels overall. However, there may still be some individual contracts they are working on. The $3.5 billion quarterly outflows may be a reasonable estimate for the near future, but this is partly due to market fluctuations and not just participant-level retention.

The company has decided to lower its RBC target due to changes in its liability and risk profile, as well as its extensive analysis of capital at risk. This decision was made after the company exited and reinsured certain products a few years ago. The company will continue to evaluate its RBC level and may operate at a lower level in the future.

The company has lowered its target RBC level from 400% to a range of 375% to 400%, resulting in a difference of $360 million. They do not plan to immediately lower their RBC level and will remain prudent in the current volatile and uncertain environment. They may operate in the upper portion of the targeted range and expect some volatility quarter-to-quarter due to organic growth opportunities. The Bermuda entity for PRT will not free up a lot of capital, but will allow for a slightly higher volume of PRT cases with similar amounts of capital.

The speaker responds to a question about the company's EPS trend and states that they are confident in their 9% to 12% growth target. They will spend more time considering the seasonality factor for 2025, but their performance in the first half of the year is as expected. They plan to be more transparent about seasonality in the future, particularly for the PGI and SBD businesses. The speaker also mentions the unpredictable seasonality of the dental business due to COVID.

The company experienced positive underwriting trends in the current quarter, offsetting any elevated seasonality. They plan to be more transparent in their outlook for 2025 and will provide additional thoughts at their upcoming Investor Day. The seasonality was not unexpected, but the impact on overall EPS was not quantified. The company has resolved all office maturities for the year, with $290 million remaining. They are working to bring these to a positive outcome, and there was a $23 million impact on CML losses in the second quarter.

The company's reserves have increased by $25 million, with $15 million coming from loan-specific reserves and $10 million from general reserves. The company's overall commercial mortgage loan portfolio and office portfolio are of high quality. There is an expectation of a rate-cutting cycle, which is leading to increased interest in longer-duration fixed income strategies and the company's high-quality, high-yield franchise. On the equity side, the company's REIT franchise is expected to benefit from the rate-cutting cycle.

The speaker believes that the real estate market will continue to see an increase in refinancing due to new sources of capital and the anticipation of rate cuts. They plan to leverage their product portfolio and focus on high-growth markets while being mindful of expenses. They also invite listeners to attend Investor Day on November 18th.

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