Principal Financial Group, Inc. — 2024 Q1

Yes. Ryan. Thanks for joining the call. And Kamal Bhatia is here with us to replace Pat Halter. He's certainly getting well-grounded after having been with us now for 4 years and an industry vet. So with that, I'll ask Kamal to respond directly to you.

Ryan, thank you for your question. Thanks, Dan. Ryan, I'll just reiterate something Dan said and give you additional data points that will help you with your question regarding what we see from a sentiment perspective. As you saw, we had a very good flow quarter particularly on the institutional side with real estate and fixed income. And also, as we -- as Dan mentioned, we had our best quarter in mutual fund sales in 2 years.

Yes. At 28 to 29 is where we said it would be and it falls within that range and maybe Kamal any additional comments you'd like to make here?

Sure. I'll give you a couple of data points on that, Ryan, as well, maybe 3 data points. As Dan said, we remain comfortable in managing to our 28 to 29 data points. So just with respect to 1Q, market conditions did shift the product mix, which impacted our revenue. As you heard in our comments earlier, if you exclude the previously communicated large outflow at the beginning of 1Q, our flows were positive.

Chris, please?

Yes. Thanks for the question, Suneet. Yes, on a participant basis, we are seeing a little bit of an uptick in the participant retirement withdrawals. So again, that's going to really be impacted both by the strong equity markets, which actually increases account values and then when they take the withdrawals that has of an impact. So we are seeing some elevated activity in participant withdrawals in the first quarter, and we'll be monitoring those elevated withdrawals through the balance of the year.

I was going to first just make any comments with regards to the higher fees rate environment and how we might see that play its way through in terms of that capture perhaps benefiting that.

Well, we definitely are seeing the benefit from higher interest rates in RIS. And certainly, we're getting some benefit as we capture participant accounts on rollover to the extent that we capture those accounts, either an IRA rollover or SAFO, we definitely are seeing some benefit in bank in terms of those higher interest rates as well. So we do see retirement withdrawals. We capture some of those withdrawals on rollover and to the extent they end up within our bank product, we do see some benefit from that as well. Sorry to interrupt, you can go ahead.

Yes. Suneet, on that one, I think competitors generally don't disclose that. And so we don't disclose that at this point.

Correct me, onetime we used to share that number years ago and a benefit event, there's job changers, the retirees. It's really trying to identify the best prospects for Principal and whether that's retained through partnering with our brokers that brought the business to us or it is on a direct basis, but it's -- again, it is a significant part of our value creation for our participants to be able to give them that choice of benefit event for either purchasing a Principal product or, in many cases, leaving the money in the plan, and that's another area that's sort of hard to measure because we don't know how long that money will stay within the plan. But anyway, it's -- there's a real mix of measurements out there in the industry. Hopefully, that helps.

Wes, congratulations on joining Autonomous. I appreciate you being on the call. One other thing I'm just going to add before Chris jumps into the specifics. We just -- actually, we're on the West Coast together, Chris and I and his team with our institutional client counsel and our institution client advisory group and the feedback was really positive. We really are seeing a strong momentum with our customers in terms of them embracing, helping their participants be better educated, very open to providing additional services to those plan sponsors. And frankly, the IRT integration is well behind us at this point in time. And the sentiment was quite positive. Chris, do you want to go ahead and respond directly to the question.

Sure. Yes. I think was your question was about PRT and the momentum in PRT and what we expect for the year? I mean, we certainly had a strong start to the year in the first quarter with PRT sales at close to $800 million. We certainly saw that carryover benefit from the fourth quarter. We saw a good fourth quarter momentum, and that carried into the first quarter. And so we continue to take advantage of that and most importantly, we did that above our targeted returns. As we've talked about in the past, we really tried to get the right balance between gross and net bill, growth in our PRT business and overall returns.

Yes. My guess is that's going to be sorted out over the next 6 to 12 months as we continue to digest this most recent decision on the Department of Labor. It's something I've been involved with all the way back to 2010. One of the pieces of good news that came out of that is the regulation that provides a bit more clarity on guidance and advice in education at the work site, which we find very positive. But I don't think we've got this all sort of out, except to say that it will require more licensing on the part of some of our internal personnel. There's training that will need to take place. And of course, just the appropriate oversight and overseeing these registered reps and staying in compliance and working on matters related to transparency and disclosure.

Great questions, and I'll just have Chris pick that one up, Joel.

Yes. Great. Thank you, Joel, for the question. So we think fee revenue rate performed largely in line with our expectations this quarter. We've previously guided that we expect in the neighborhood of 2 to 3 bps of compression in normal markets.

And I think it's another example of where Principal focuses on that SMB marketplace where we still see growth in a strong, vibrant SMB place in which we do business. So do you want to go ahead and cover that, Amy?

Yes, sure. Thanks for the question. So a couple of questions embedded in there, kind of what's going on, on that line and then let's look at it sort of sequentially. And the answer actually to both of those questions kind of comes back to the same product. So one of the newer products in that group and keep in mind, when we look at group disability, we're going to have long-term disability, short-term disability and that paid family medical leave is going to be on that line.

Yes. Yes. I talk about that. One of the things that we always keep track of because we want to make sure that what's happened with our growth. And again, we're really pleased with the growth we're seeing. We like the growth rates we're seeing across our specialty benefits line. But one of the things we look at consistently is what's coming from what we would consider net new business versus what's coming from that employment or wage growth and then what's coming from rate actions.

Hopefully, that helps John?

Yes. Great question. And frankly, we don't use a lot of employment agreements here at Principal. I'd like to think the culture that we've built allows us to attract and retain talent for the organization. Within asset management, we're paying competitive fees. We have a lot of flexibility, and we've had frankly not a lot of turnover.

No. John, just to add on, Dan covered it very well. I think you'll remember that we are one of those firms that continues to get year-over-year the reward for being best places to work in money management. And one of the reasons for that is the culture we have created in our Investment Management or Asset Management division. And 2 of those reasons are obviously the investment culture that really encourages independent thinking and independent growth, which is what the top tier investment talent always looks for. We don't have a top-down view. And our view is you can create an environment where the best investors can do their work without having a big legal structure around it. And so I would just point to that as the additional data point.

Amy?

Yes. So it is looking favorable. What I would say is we continue to reiterate that, that long-term range that we have is -- we're going to be probably towards the lower end of that range. We have definitely seen the market as well as our portfolio do a little bit of repricing. What I would say is, though, that's not been in one consistent direction.

Chris?

Yes. Thanks for the question. Yes. So we certainly, over the last couple of years, have seen a lot of new entrants into the PRT market. I think what distinguishes us and gives us competitive advantage is the fact that we know the defined benefit business extremely well. We've been involved in it. We know that we provide consulting services on it.

Good to hear from you, Tom. Amy?

Yes. So I'll give you my perspective on that. Keep in mind that our portfolio is going to be squarely in that small to mid-sized marketplace. So when we work with smaller or midsized employers, the things that we typically have to do in terms of the maximums we put in, the types of coverage they want maybe on some of their executive populations, the types of standards and what we will do in terms of what is underwritten as a group. We tend to stay closer to sort of a fundamental smaller box.

I have not seen it filter down. Correct.

Yes. Tom, I would say that has stayed relatively stable in that, call it, anywhere between 17% to 20%. So we're not seeing a big increase. The big increase happened when we integrated the IRT block, which tended to be a larger customer. But we're a little bit more steady state now that we're 5 years beyond that acquisition. So I would say it's staying relatively constant.

It looks pretty similar to the overall block.

Amy?

Yes, happy to answer that. I see it more as a one-off, more as an aberration as you're saying, than indicative. We continue to see some seasonality with the business. We build a bit of that seasonality expectation in, especially for kind of that first quarter claims. What I would say is we do expect 2024 earnings to be higher than 2023. And we think the margin results, as we communicated in outlook expectations are going to be just below that lower end of that long-term guidance range. So we're seeing more of an adjusted margin expectation to be in that 13% to 15% range for the bulk of the year for Life.

Yes, Jimmy, I appreciate the question. So you're exactly right. One of our primary concerns was our ability to, in the normal course of working with plan participants, providing them with education and guidance and then it wouldn't fall underneath the definition of the fiduciary rule.

Mike, great question. Thank you for asking. I think we started organically a private credit business inside Principal. We are quite proud of the investment results we have generated with that business over the past 3 years. And as you highlighted, it's one of the high-growth areas in asset management.

I'm glad you asked the question because you're on the verge of breaking a record of never having a question for the CFO. So I think Deanna is very enthusiastic about this response.

Yes. Thanks a lot, Mike, for the question. I actually just woke up, and so I can now answer the question. So a couple of things there. As you remember from our last call, we really started that entity to really support new business, both on the term life side as well as PRT. It really is going to allow us to look at more growth opportunities for the same amount of capital usage.

Does that help, Mike?

Yes. Thanks, Wes, for coming back in. You're correct. We did have some pressured variable investment income in the quarter. Actually, the drivers were a little bit different than what we have seen. If you look at it in total, it was a little bit lower than what we would have seen in the second half of the year, more similar to the first half of '23 but some of the drivers were a little bit different. Again, we continue to see minimal prepays in the quarter. We also saw lower real estate activity in the quarter.

Chris?

Yes. Wes, thanks for that. We continue to participate in the variable annuity market. And the only other thing I'd point out is in midyear last year, we did launch a registered index-linked annuity product which shows up a little bit more as in our spread based. That is a business that is nicely since its launch, and we've seen nice momentum in that RILA business. If you've been following the annuity trends, you know that the RILA space is the largest growing portion of the RILA market.

Well, we feel good about the start of the year, and we remain laser like focus on delivering our 2024 outlook, including profitable growth, leveraging technology and innovating products. We want to make sure that we are maintaining our disciplined approach to capital deployment, which I discussed earlier. And of course, we always want to be mindful of aligning our expenses with revenues.