Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Principal Financial Group Inc (PFG, Financial) reported a 7% increase in EPS to $1.63 per diluted share for Q2 2024.
- The company achieved a 6% increase in net revenue year-over-year, driven by business growth and favorable market conditions.
- Principal Financial Group Inc (PFG) repurchased $250 million in shares and paid $165 million in common stock dividends in Q2 2024.
- The company ended the quarter with total managed AUM of $699 billion, despite inflation headwinds.
- Principal Financial Group Inc (PFG) strengthened its leadership position by acquiring a censuses employee stock ownership plan business, adding 800 more employer customers and over 5,000 new Aesop participants.
Negative Points
- The company faced a bifurcated market environment, with small-cap and international equities lagging behind the S&P 500.
- Principal Financial Group Inc (PFG) reported negative net cash flow of just over $2 billion, driven by a large, lower-fee fixed income redemption from a corporate client.
- Foreign currency headwinds, particularly in Brazil, negatively impacted Principal International's performance.
- The company experienced higher participant withdrawals in the second quarter, primarily due to favorable market impacts on account values.
- Variable investment income remains pressured, with minimal prepayment fees and muted real estate actions impacting earnings.
Q & A Highlights
Q: In Retirement fee revenue looked a little light of what I was expecting and it looks to be on some further fee rate compression. Anything unusual in the quarter or any other dynamic that I should be thinking about where the retirement fee levels?
A: (Christopher Littlefield, President, Retirement and Income Solutions) We feel really good about our net revenue growth of 8%. Fee rate was down less than a bit sequentially and about two bps on a trailing 12-month basis. The trailing 12-month view is the best way to view fee revenue rate due to fluctuations between quarters. Factors include non-asset-based fee revenue, market performance patterns, and diversified equity exposure. We remain confident in our guidance of 2-3 bps over a full year in normal markets.
Q: How much of your Defined Contribution business is now in guaranteed or spread-based products, and how has that grown in recent years?
A: (Christopher Littlefield, President, Retirement and Income Solutions) We are seeing an increased use of guaranteed account products in WSR. The economics are shifting from fee to spread, and we are seeing growth in our ability to earn placements of our guaranteed products.
Q: Your EPS for the first half of the year seems to have a pretty good step-up in EPS in the second half. What are the key factors driving that?
A: (Deanna Strable, EVP & CFO) We acknowledge the need for a meaningful increase in second-half results to meet guidance. Our 9% to 12% EPS growth refers to adjusted EPS growth off of $6.92 in 2023. Factors include seasonality in SPV and PGI, natural business growth, reduced share count, and historical EPS patterns. We remain confident in our full-year guidance.
Q: On PGI and expenses, there were some severance costs, but expenses didn't come down as much as expected. What drove expenses higher this quarter, and how should we think about that for the rest of the year?
A: (Kamal Bhatia, President and CEO of Principal Asset Management) The expenses were elevated due to severance costs and reinvestments in the business, particularly around infrastructure. We are adapting our investment model and remain confident in our margin outlook.
Q: In pension risk transfer, you had $1 billion in sales in the quarter. What are you seeing in the pipeline, and does it still look robust?
A: (Christopher Littlefield, President, Retirement and Income Solutions) The market remains robust with industry expectations of $30 to $40 billion in PRT for the year. We took advantage of opportunities in the second quarter and expect to be close to $3 billion in PRT sales for the full year.
Q: On participant withdrawals in 401(k) plans, you mentioned elevated levels. Can you unpack what you're seeing in terms of participant withdrawals?
A: (Christopher Littlefield, President, Retirement and Income Solutions) Elevated withdrawals are primarily due to market performance inflating account values. There is a slight uptick in withdrawal rates, but it's mostly driven by market impact. Advisors are also being opportunistic, especially with higher average account balances.
Q: Given the strong PRT volume and potential headwinds to the fee business, will PRT be a bigger focus for business growth for the remainder of the year?
A: (Christopher Littlefield, President, Retirement and Income Solutions) We see nice momentum in our PRT business and expect to be close to $3 billion in PRT sales for the full year. We balance growth with return and focus on capital investment.
Q: Could you provide an update on your use of Bermuda and expectations going forward? Any capital relief we should be thinking about?
A: (Deanna Strable, EVP & CFO) Our Bermuda entity was created for new business, both term and PRT. Term Life new business continues to be reinsured to Bermuda. PRT new business is evaluated on a case-by-case basis. We expect to use Bermuda for some PRT sales in the second half of the year.
Q: Can you discuss plan level retention this quarter and whether you had any large case losses?
A: (Christopher Littlefield, President, Retirement and Income Solutions) We have seen very favorable contract retention at all-time positive levels for Principal. No significant large losses and strong contract retention across all segments.
Q: Why did you feel comfortable lowering the RBC target at this time, and what is the potential capital benefit from using the Bermuda entity for PRT?
A: (Deanna Strable, EVP & CFO) We lowered our RBC target to a range of 375% to 400% based on our business mix and risk profile. The difference between 375% and 400% is about $360 million. We have no immediate plans to lower RBC to that level and will remain prudent. The Bermuda entity allows us to go after a higher volume of PRT cases for similar amounts of capital.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
