Humphrey Lee:

Thank you, and good morning. Welcome to Principal Financial Group's second quarter 2024 earnings conference call. As always, materials related to today's call are available on our website at investors.principal.com. Following a reading of the Safe Harbor provision, CEO, Dan Houston and CFO, Deanna Strable will deliver some prepared remarks. We will then open up the call for questions. Other members of Senior Management will also be available for Q&A. Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events, or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K filed by the company with the US Securities and Exchange Commission. Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable US GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. As a reminder, we are hosting our 2024 Investor Day on Monday, November 18th in New York. We look forward to seeing many of you at this event. Dan?

Deanna Strable:

Thanks, Dan. Good morning to everyone on the call. This morning, I'll share the key contributors to our financial performance for the quarter, as well as details of our capital position. Second quarter reported net income was $353 million. Excluding exited business, net income was $356 million with minimal credit losses of $25 million. Non-GAAP operating ROE of 13.1% improved by 80 basis points compared to the year ago period. We continue to trend toward our 14% to 16% target. Excluding significant variances, second quarter non-GAAP operating earnings were $415 million, or $1.76 per diluted share. EPS increased 4% compared to the second quarter of 2023. This was driven by top line growth and improved markets, partially offset by foreign currency translation impacts and a higher effective tax rate. During the quarter, we had one-time expenses, including state tax items and severance costs, impacting our results by approximately $0.09 per share. The one-time expenses impacted both PGI and the Corporate segment. While we are not considering these as significant variances, our second quarter earnings per share growth would have been over 9% compared to the second quarter of 2023, adjusting for these expenses. Foreign exchange rates continue to be a headwind to earnings compared to both the sequential and year ago quarter, as the US dollar strengthened against Latin American currencies. Based on our earnings for the first half of 2024 and our forecast for the remainder of the year, we remain on track to deliver full-year EPS growth on both a reported and adjusted basis aligned with our 2024 guidance of 9% to 12%. This implies strong growth across our businesses in the second half of the year. Turning to the significant variances for the quarter as detailed on Slide 12. These impacted non-GAAP operating earnings by a net negative $38 million pre-tax, $29 million after-tax and approximately $0.13 per diluted share. Significant variances in the quarter include lower variable investment income in RIS and Benefits and Protection, unfavorable encaje performance in Principal International and a small GAAP-only regulatory closed-block dividend adjustment in Life Insurance. Variable investment income improved sequentially on stronger alternative returns. Real estate transactions were muted, and we had no prepayment fees in the quarter. The second quarter non-GAAP operating earnings effective tax rate was higher than our guided range. This was primarily due to a decrease in the Iowa corporate tax rate, resulting in a non-cash remeasurement of our deferred tax assets. While this impacted our tax rate in the current quarter, it is a net long-term benefit. For the full year, we still expect to be within the 17% to 20% guided range. Turning to the business units, the following comments exclude significant variances. RIS pre-tax operating earnings increased 10% over the second quarter of 2023, driven by growth in the business, higher net investment income and favorable market performance. Net revenue grew by nearly 8% and margins remained strong and at the high end of our guided range, while we continue to invest in the business to drive future growth. PGI's pre-tax operating earnings increased 2% over the second quarter of 2023. Higher management fees from increasing AUM were partially offset by the impact of recent redemptions, as well as immaterial performance fees. Adjusted margin of approximately 35% is flat relative to the year ago quarter, an increase from a seasonal low in the first quarter. In the quarter, earnings and margins were impacted by approximately $6 million of severance and other one-time expenses. In Principal International, pre-tax operating earnings decreased by 7% compared to the second quarter of 2023. On a constant-currency basis, operating earnings were flat. Strong growth in Latin America was offset by lower earnings from Asia. We are starting to see improvements in the macro climate in Asia. Combined with the continued strong performance in Latin America, we feel very good about a strong second half of the year. Specialty Benefits pre-tax operating earnings increased 11% from the second quarter of 2023. This was driven by continued growth in the business and more favorable underwriting experience. Underwriting results improved by 50 basis points compared to a year ago and highlights the diversification across product lines. Improved results in group life and group disability more than offset the higher dental seasonality. We expect the seasonality to moderate in the second half of the year. In Life Insurance, we negotiated two risk-reducing YRT reinsurance contracts in the quarter for our existing business as well as our transacted ULSG block. These actions locked in guaranteed rates and reduced our overall YRT risk, resulting in an immaterial impact on earnings. Excluding the impact of these YRT related activities, premium fees grew 4% compared to the year ago quarter at the top of our guidance range. This was driven by continued business market strength, where premium fees grew 15% in the quarter. Across the businesses, we remain confident in delivering on our revenue growth and margin guidance for the full year, anchored to our long-term financial targets. Turning to capital and liquidity. After thoughtful evaluation of our capital levels based on our business mix and capital at risk profile, we have revised our RBC target to a range of 375% to 400%. We believe this new target is more suitable for our liability profile and gives us additional flexibility to manage our capital based on external conditions and new business opportunities. We have no immediate plan to lower our RBC level and will operate prudently within this range. Our estimate of second quarter RBC ratio was 405%. Based on this new target, we have approximately $1.6 billion of excess and available capital, including approximately $800 million at the holding company, $450 million excess above 375% RBC, and $300 million in our subsidiaries. As shown on slide three, we returned $415 million to shareholders in the second quarter, including $250 million of share repurchases and $165 million of common stock dividends. This brings our year-to-date capital return to nearly $800 million. We expect to deliver on our targeted 75% to 85% free capital flow for the full year. As discussed on previous calls, due to the timing of capital generation, free capital flow tends to increase throughout the year. We are committed to returning excess capital to shareholders and continue to expect $1.5 billion to $1.8 billion of capital deployments for the full year, including $800 million to $1.1 billion of share repurchases. The previously mentioned ESOP acquisition had an immaterial impact to our capital deployment plans. Last night, we announced a $0.72 common stock dividend payable in the second quarter, a $0.01 increase from the dividend paid in the second quarter and an 11% increase over the third quarter 2023 dividend. This continues to align with our targeted 40% dividend payout ratio and demonstrates our confidence in continued growth and overall performance. We remain focused on maintaining our capital and liquidity targets at both the life company and the holding company and will continue a balanced and disciplined approach to capital deployment. Our investment portfolio remains high quality, aligned with our liability profile, and well-positioned for a variety of economic conditions. The commercial mortgage loan portfolio remains healthy. Coming into the year, we had $510 million of office loan maturities in 2024. All maturities to date have been paid off or resolved and we have $290 million remaining. The underlying metrics on these loans remain strong, and we continue to work with our borrowers to pay off or refinance the remaining maturities. In closing, we are confident of our ability to deliver on our enterprise 2024 targets. These include a 9% to 12% growth in earnings per share, increasing return on equity, and 75% to 85% free capital flow conversion. We are encouraged by the underlying fundamentals of our businesses and expect growth to accelerate in the second half of the year. We are grounded in our growth drivers of retirement, asset management and benefits and protection and executing on a strategy focused on continuing to drive long-term shareholder value. This concludes our prepared remarks. Operator, please open the call for questions.

Joel Hurwitz:

Hey, good morning. In retirement, fee revenue looked a little light of what I was expecting and it looks to be on some further fee rate compression. I know last quarter, we discussed the impact of some of the business having non-asset-based fees. But even factoring that in, it looks like there was a bit of an acceleration of the fee rate decline. Anything unusual in the quarter, any other dynamics that I should be thinking about with retirement fee levels?

Christopher Littlefield:

Yeah. Thanks for the question, Joel. I mean, I think, again, I'd start with when we look at our net revenue growth of 8%, we feel really good about where net revenue is coming in for the year. But when we look at fee rate, we were down less than 1 bp sequentially and down about 2 bps on a trailing 12-month basis during a period of significant market outperformance. And we think the trailing 12-month view is the best way to view fee revenue rate, given the fluctuations that occur in between the quarters, whether that's market performance or timing of consulting and other billable services. But if I were to highlight sort of four things, I'd highlight four things with respect to the fee revenue rate. First, as you noted, that fee-based revenue is not all tied to assets. So that average AV, which is the denominator, increases faster than the numerator, particularly when you have significant market outperformance like we've seen over the last couple of quarters. Second, the pattern of market performance matters, and that market decline in April resulted in a notable difference in monthly average AV. So that's another factor I'd highlight. Third, while point to point look at the S&P 500 is a conventional gauge for looking at market performance, as we pointed out in our investor slides, our equity exposure is more diversified and we saw less correlation to the S&P 500. And so, we outlined those specific exposures in fee-based in the investor presentation, excuse me, the investor presentations. And while large cap performed well during the second quarter, small-cap, mid-cap, international, fixed income and real estate were all flat to negative. So we didn't see anything notable. We continue to sort of be confident in our guidance at 2 bps to 3 bps over a full year in normal markets and outperformance in the markets can fluctuate that a bit. And I'd reiterate again with respect to our guidance, we believe that we're going to be at or above our net revenue guidance for the full year and at the top of our margin guidance. So feel really good about our performance.

Joel Hurwitz:

Yeah. That was helpful. Thank you. I guess just, Chris, I'll stick with you in retirement. How much of your defined contribution business is now in guaranteed or spread-based products? And I guess, how has that grown in recent years?

Joel Hurwitz:

Okay. Thank you.

Operator:

Thank you. The next question is coming from Ryan Krueger of KBW. Please go ahead.

Daniel Houston:

Yeah. Before I have Deanna answer that question, Ryan, just know that we spent a lot of time looking at the underlying businesses themselves to understand what the growth is and we've got a lot of historical precedents relative to the -- how these tend to mature and to get to where we're at today. And we feel, as I said in my earlier comments, quite confident on our ability to hit that. With that, I'll let Deanna answer that specifically.

Daniel Houston:

Thanks, Deanna.

Daniel Houston:

Thanks, Ryan.

Wesley Carmichael:

Hey, good morning. Thanks for taking my question. On PGI and expenses, I know you mentioned there were some severance costs, but it seems like expenses didn't come down quite as much as you're expecting last quarter. So just wondering if you have any color on what drove expenses higher this quarter and how we should think about that for the rest of the year?

Kamal Bhatia:

Thank you, Dan. Thank you, Wes. So I think as you mentioned, this quarter, we did have, as we mentioned in the notes to you that we did have some severance cost of roughly $6 million that was staff-related. But before I go there, I think it's worth reminding that the asset management business is a highly competitive business and we are constantly adapting our investment model. So one of the things we'll continue to do is look at our capabilities and talent where appropriate and adjust it. So to your question, expenses were elevated also with respect to the reinvestments we are making back in the business. In particular, I'll point you to Dan's comments around infrastructure debt. We are particularly focused on making sure we have the capabilities for the future as we adjust our business mix. In addition to that, I think from an OE perspective, you will see there were some market adjustments due to the nature of our AUM, but we remain confident in our expense management capability and we also remain confident in the outlook guidance we gave you to on margin.

Wesley Carmichael:

Yeah. No, thank you. In pension risk transfer, I guess you guys had $1 billion in sales in the quarter. Last quarter, some competitors were making some comments and mostly related to, I think private equity-related companies, but around lawsuits against plan sponsors kind of chilling volumes in that market. So just wondering what you're seeing in the pipeline, if that still looks pretty robust?

Christopher Littlefield:

Yeah. Thanks, Wes. Yeah, no, we still see the market as pretty robust. I think the market overall is -- industry expectations are $30 billion to $40 billion in PRT for the year, and we don't see that really slowing down. And certainly, we took an opportunity to -- in the second quarter to put on some additional nice PRT business. We're exceeding our targeted returns and getting nice opportunities on PRT. And so, not seeing anything from a macro basis that would suggest that the PRT market is slowing down.

Daniel Houston:

Thanks, Wes.

Jimmy Bhullar:

Hey, good morning. So first, just a question on PGI net flows. I think each of the past few quarters, you've outlined sort of low fee mandates pressuring your flows. I'm just wondering if the business that you've lost, did that become low fee mandate over time or was it such when it came on? And how is your approach to such blocks of business different than when you might have put this business on?

Kamal Bhatia:

Absolutely. Jimmy, that's a great question. So let me just start with this quarter. And I think your question was both on what the net cash flows look like, but the low fee nature of these net cash flows. So as we highlighted, we had almost a $900 million outflow in a single mandate, a long-duration, fixed-income mandate. To your question, these were always low fee. They did not become low fee over a period of time and they were with us for a while. In addition, I think it is worth highlighting that if you look at our net cash flow and Dan mentioned this, I think our durable sources of net cash flow remain quite strong, in particular, almost $500 million of real estate flows, which are very high revenue and high margin for us. And we also highlighted that as we continue to expand our business mix, $150 million of flows in private credit, which are obviously both high revenue and high margin as well. So, we do feel good about the mix of our business with respect to the assets we are bringing in or in asset classes that have a durable trend and have higher revenue. And unfortunately, the mandates we did lose were in lower revenue mandates. Hopefully, that answers the question.

Daniel Houston:

Yeah, it's a great question. And obviously, that gets a lot of attention. As a matter of fact, Deanna and I and Kamal and his leaders get together frequently to interrogate the sources of underperformance where they are and had a very robust conversation in the last couple of weeks. It's why we've enhanced the slide deck to provide you with a different perspective on asset-weighted and equal-weighted perspective. But again, I think Kamal and his team have done a really good job of truly understanding where these sources of underperformance are and frankly, how good performance is in many of our strategies. Kamal, do you want to provide some additional insights?

Jimmy Bhullar:

Thank you.

Operator:

Thank you. The next question is coming from John Barnidge of Piper Sandler. Please go ahead.

Daniel Houston:

Yeah, and good morning, John. Look, the first thing I would say is we take a very disciplined approach as we think about the overall portfolio of our business between fee spread and risk. And we do that very intentionally for enterprise risk management. Having said that, in the area of PRT, the opportunity set right now, it's very attractive, and the return profiles we really like and we like the liability just that we're seeing. But with that, I'll have Chris add some additional perspective on his outlook for the second half of the year on PRT?

John Barnidge:

Thank you for those comments. My follow-up question, given that opportunity with the full suite of products, if I provide those solutions, are you -- as you look at your pipeline, is average transaction size getting larger? Thank you.

John Barnidge:

Yeah.

Daniel Houston:

And John, just to pile on that, also remember that this is just part of our TRS suite. So a lot of those defined benefit clients, they know us from being a 401(k) client, they know us from being a deferred income, non-qualified deferred compensation client for even ESOP. So there really is a symbiotic relationship across this platform, and we're an obvious provider of the PRT on these defined benefit existing customers.

Daniel Houston:

Thanks, John.

Elyse Greenspan:

Hi, thanks. Good morning. My first question is just on your use of Bermuda. If you can just provide an update there and just expectations going forward and any capital relief -- incremental capital relief we should be thinking about? And if you guys use that entity for any pension risk transfer deals yet?

Deanna Strable:

Yeah. Thanks, Elyse, for that question. As we've discussed previously that our Bermuda entity was created for new business, both term and PRT. But to cede the entity, we seeded it with some in-force business of both of those product lines as well. Our term life new business all year has continued to be reinsured to Bermuda. That just kind of happens naturally. For PRT, that new business is evaluated on a case-by-case basis, as case specifics really matter to determine if Bermuda is optimal from a capital efficiency and operational perspective. None of our first half PRT sales have utilized Bermuda, but we expect to be in a position to leverage Bermuda for some of our sales in the second half of the year.

Daniel Houston:

Deanna?

Daniel Houston:

Thanks for the questions, Elyse.

Suneet Kamath:

Thanks. Good morning, everyone. Dan, I wanted to talk about participant withdrawals and 401(k). You mentioned that in your prepared remarks being at an elevated level. One of your peers recently alluded to the impact advisors are having on rollovers. So can you just maybe unpack what you're seeing in terms of participant withdrawals?

Christopher Littlefield:

Yeah, no. No, I think that's pretty much it. No, no, it's perfect. Yeah, and thanks, Suneet. The only thing I'd add is that's an area where we continue to invest and continue to get better in terms of driving improvements in our IRA, earning more IRA rollovers and keeping those assets either in plan or in an IRA with Principal, and we've seen success on that over the last couple of quarters. Specifically with withdrawals though, I just want to make sure I'm clear though, we're only seeing a very slight uptick in rate. So it's much more about market impact on what we're seeing in withdrawals than it is on rate of participant withdrawals. And so, that market inflating account values and when withdrawals are taken, it's just larger amounts being taken. And it's also while it's anecdotal, people tend to retire in up-markets. And so, you would expect to sort of see people maybe taking advantage of high account values at that point in time and taking opportunity. But again, this is much more, I'd call it, more than 75% of the attribution is to market and then a little bit more on the slight increase in rate.

Suneet Kamath:

It does. And I think there are some things that you guys have that maybe others don't. So that's helpful. My follow-up and it's related is if we think about RIS, you gave us the net revenue growth target, but obviously, that combines to John Barnidge's question, PRT as well as the fee business. So if we were to just look at the defined contribution business at Principal, can you give us a sense of what revenue growth looks like there and maybe how it compares to the industry?

Christopher Littlefield:

Well, I think what we've done as we've gone through the segment reporting is we don't break down specifically the fee and the spread revenue components. What I would say is we feel good about where we're at. We believe that we're growing at or above the industry average in terms of revenue rate. But yeah, we're sort of looking at all of our retirement business together because that's how we operate and manage and lead that business. So again, if I were to think about sort of dynamics, we sort of pointed out the core strength of Principal in that small to mid-market continues. We're at -- we're ahead of plan with respect to sales and revenue rates on our small to mid-business. Large tends to be a little bit more open arc and so the revenue profile is a little bit different. But in our core markets, if we think about recurring deposits on small to mid-up 10% and small to mid-versus overall at 7%, we think about new business net revenue is up, our pipeline is up. So, we actually feel really good about the overall performance of our fee business.

Suneet Kamath:

It does. Thanks.

Operator:

Thank you. The next question is coming from Tom Gallagher of Evercore ISI. Please go ahead.

Daniel Houston:

Yeah. Let's drag on Chris and his team because they've had significant improvement with the full integration of the acquisition and the most recent acquisition on the ESOP side. And we're very excited about our retention in both small, medium and large. Chris?

Thomas Gallagher:

So you feel like you've gotten through the whole pig through the python from the Wells transaction, you don't see a lot of risk to those going forward. Is that fair?

Thomas Gallagher:

Great. And then just my follow-up is, so considering that and just listening to your comments about participant-level retention and outflows, would you say the -- and granted, I think your comments are totally fair, like it's part of this just based on asset levels. When the market goes up a lot, you're -- the same level of participant account value results in a larger redemption. So I totally get that. But having said that, when I look at the $3.5 billion of quarterly outflows this quarter, considering there's very good planned level retention, is that a reasonable sort of glide path to think about going forward here for a while? So obviously, aside from the Q -- seasonally stronger Q1, is that like a decent run rate that we should be thinking about, just given all those dynamics?

Thomas Gallagher:

Okay, thanks.

Operator:

Thank you. The next question is coming from Wilma Burdis of Raymond James. Please go ahead.

Daniel Houston:

Yeah, Wilma, I really appreciate the question. I'll have Deanna respond.

Wilma Burdis:

Thank you. And could you help us size or quantify the potential capital benefits from using the Bermuda entity for PRT? And I know you mentioned a little bit earlier how you're thinking about using that, but maybe help us think about how you would think about it over the next 18 months or two years or so. Thanks.

Daniel Houston:

Thank you, Wilma.

Joshua Shanker:

Thank you. I think you answered mostly sufficiently. I want to go back to Ryan's question about the EPS trend. I have no doubt in your confidence that you're on track for the 9% to 12% growth. But when I look out to 2025, how much of the seasonality factor that you're experiencing in '24 is going to repeat and how much did the seasonality surprise you in '24 that you would not expect to recur in '25?

Deanna Strable:

Yeah, Josh, that will be something that we spend a little bit more time thinking about prior to outlook. But one fact that I would say is, if you look at our performance for the first half of the year, we're operating pretty much exactly on top of what we would have expected. And so from that perspective, I don't see anything that would change on kind of that pattern of earnings. But one of the commitments we have is as we go into outlook in early '25, we want to make sure we are more transparent on that level of seasonality that we expect in total, but also for a few of the key businesses like PGI and SBD. Obviously, one wildcard to that I know we continue to talk about is the dental pattern of seasonality. It's continuing to be different than what we experienced pre-COVID. I think we thought it might materialize a little bit different. We were fortunate in the current quarter that any of that elevated seasonality was offset by positive underwriting trends in both life and disability. But I'd say that's probably the one wildcard relative to that, but our commitment to you is to be a little more transparent as we come into the year of 2025.

Joshua Shanker:

So just to be clear that the seasonality wasn't well enough vocalized during the outlook, but things are actually in line with how you'd expect the patterning of earnings with the exclusion of that dental item.

Joshua Shanker:

Okay. Thank you very much.

Operator:

Thank you. The next question is coming from Mike Ward of Citi. Please go ahead.

Daniel Houston:

Yes, we can actually do that. Deanna, do you want to take it?

Daniel Houston:

Hopefully, that helps, Mike.

Kamal Bhatia:

Yeah, Mike. That's a great question. So I think like many other economists, our own view is we are going to see a rate-cutting cycle start here. But maybe to your question, I'll answer it from two perspectives, how it impacts our current book of business, but also how we see that helping or what we are hearing from clients in terms of engagement. What I would point out to you is, I do think there is increasing conversation now we are having with clients in anticipation on that, on the fixed income side. There is a view that we are fairly sanguine in terms of the economic outlook. And as rate cut cycles begin, historically clients look to longer-duration strategy. And one of the areas we see a lot of interest is in our high-quality, high-yield franchise, which obviously has excellent performance, but that's an area we continue to see more interest. With respect to the equity side, clearly, our REIT franchise, which is a big portion of our business would benefit from that cycle starting, and traditionally equities move faster in anticipation of rate cuts than private equity real estate. So, I wouldn't expect it to be any different this time. When you look at the macro trends in real estate, there is new sources of refinance capital emerging. When you look at the marketplace, you do see increase in CMBS, new issuance, both SASB and conduit deals are improving. And you do see new entrants coming in to do refinancing. So, I generally do think the anticipation of the rate cuts is creating more volume in the marketplace, but also more engagement.

Michael Ward:

It does. Thank you, guys.

Daniel Houston:

Thanks, Dana. We'll continue to leverage our integrated product portfolio with our distribution partners around the globe. Additionally, we'll focus on our high-growth market and deploy our capital very judiciously as we've discussed today. Lastly, we know the importance of aligning our expenses with our revenues and investing for the future. That is top of mind for us, as you would expect. Thanks for your time today. I hope to see you on the road in the next few months and certainly at Investor Day on November 18th. Thank you.

Humphrey Lee:

Thank you, and good morning. Welcome to Principal Financial Group's First Quarter 2024 Earnings Conference Call. As always, materials related to today's call are available on our website at investor.principal.com.

Daniel Houston:

Thanks, Humphrey, and welcome to everyone on the call. This morning, I will discuss key milestones and highlights from the first quarter as we continue to execute our strategy with discipline and focus and deliver strong results for our customers and shareholders. Deanna will follow with additional details on our results and our capital position.

Deanna Strable:

Thanks, Dan. Good morning to everyone on the call. This morning, I'll share the key contributors to our financial performance for the quarter as well as details of our capital position. First quarter reported net income was $533 million. Excluding exited business, net income was $376 million with minimal credit losses of $19 million. Excluding significant variances, first quarter non-GAAP operating earnings were $419 million or $1.75 per diluted share.

Ryan Krueger:

My first question was on PGI flows. And I guess, in particular, can you provide some more color on the conversations you're having and kind of the optimism you discussed in the prepared remarks for continued improvement in allocations to yield products going forward?

Kamal Bhatia:

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.

Daniel Houston:

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?

Operator:

The next question is coming from Suneet Kamath of Jefferies.

Daniel Houston:

Chris, please?

Suneet Kamath:

Got it. And then, Chris -- sorry, go ahead. Go ahead. I'm sorry.

Christopher Littlefield:

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.

Christopher Littlefield:

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

Operator:

The next question is coming from Wes Carmichael of Autonomous Research.

Daniel Houston:

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.

Daniel Houston:

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.

Operator:

The next question is coming from Joel Hurwitz of Dowling.

Daniel Houston:

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

Joel Hurwitz:

That helps. And then switching gears to Specialty Benefits. So sales were very strong, particularly in group disability. Could you just provide some color on what you saw in terms of the group disability sales? And then in terms of group disability top line overall, I guess, I was sort of surprised though to see it down from where it was in Q4 given the strong sales, anything that drove the sequential decline in group disability premiums and fees?

Amy Friedrich:

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.

Joel Hurwitz:

That does. It is very helpful. Thank you.

John Barnidge:

Maybe if we could stick with that strong specialty benefit sales in the quarter. Can you maybe talk about growth from pricing versus employee count? It seems like there's pretty strong growth outside of just the paid family leave expansion.

John Barnidge:

Yes, it does. It's very helpful. My follow-up question. You have attempt capital allocation to strategic M&A in the presentation. With the change in noncompete laws, how does that impact maybe how you approach recruitment and asset management?

Kamal Bhatia:

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.

Wilma Jackson Burdis:

Just talking about the Specialty Benefits loss ratio. It appeared to be a little bit favorable despite the seasonal impact. Could you talk about some of the repricing and should we expect it to continue throughout 2024?

Amy Friedrich:

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.

Wilma Jackson Burdis:

Okay. And then can you talk a little -- could you talk a little about the -- okay. Can you just talk about some of the competitors at the small end of the PRT market? And just talk about the sourcing of those small PRT deals as well, please?

Christopher Littlefield:

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.

Thomas Gallagher:

On another earnings call, they mentioned that group life pricing is the widest, I think they've ever seen it, which sounded a bit extreme, but -- and then they were suggesting that they're seeing some aggressive price competition, and they lost business. Just curious what you're seeing specifically in group life. I know your results were pretty good this quarter there from an underwriting perspective. Are you -- would you share that view? And if so, how are you responding to it?

Amy Friedrich:

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.

Amy Friedrich:

I have not seen it filter down. Correct.

Christopher Littlefield:

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.

Christopher Littlefield:

It looks pretty similar to the overall block.

Jamminder Bhullar:

So most of my questions were answered, but maybe on individual life, to what extent were the weak margins this quarter an aberration or seasonality driven versus indicative of the earnings power of that business?

Amy Friedrich:

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.

Daniel Houston:

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.

Operator:

The next question is coming from Michael Ward of Citi.

Kamal Bhatia:

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.

Daniel Houston:

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.

Michael Ward:

Yes. That's great.

Wes Carmichael:

Maybe let's keep Deanna woken up. But on variable investment income, it was softer in the quarter, which I think is probably to be expected with lower real estate transactions, but maybe not quite to the magnitude that it was. So just hoping you could maybe share your perspective in the next couple of quarters and what your expectations are there?

Daniel Houston:

Chris?

Daniel Houston:

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.

Operator:

Thank you. This concludes today's conference call. You may disconnect your lines at this time, and we thank you for your participation.

Humphrey Lee:

Thank you and good morning. Welcome to Principal Financial Group’s fourth quarter and fourth year 2023 earnings and 2024 outlook conference call. As always, materials related to today’s call are available on our website at investors.principal.com. Following a reading of the Safe Harbor provision, CEO, Dan Houston; and CFO, Deanna Strable will deliver some prepared remarks. We will then open up the call for questions. Other members of senior management will also be available for Q&A. Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company’s most recent annual report on Form 10-K filed by the company with the U.S. Securities and Exchange Commission. Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures. Reconciliation of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. We are planning to host our 2024 Investor Day on Monday, November 18th in New York and look forward to seeing many of you over the coming months. Dan?

Deanna Strable:

Thanks, Dan. Good morning to everyone on the call. This morning, I’ll share the key contributors to our financial performance for the quarter and full year, updates on our investment portfolio, our current capital position, as well as details of our outlook for 2024. Full year reported net income was $623 million. Excluding exited business, net income was $1.5 billion for the full year with credit losses of $81 million. Fourth quarter net income, excluding exited business was $299 million with $27 million of credit losses. As a reminder, the income from exited business is non-economic and is driven by the change in the fair value of the funds withheld embedded derivative. It doesn’t impact our capital or free cash flow and can be extremely volatile quarter-to-quarter. Full year credit drift and losses were modest and better than our expectations at the beginning of the year. Excluding significant variances, full year non-GAAP operating earnings was $1.7 billion or $6.92 per diluted share. This was a 6% increase in EPS over 2022 at the top end of our 3% to 6% outlook and included $436 million in the fourth quarter or $1.81 per diluted share. As detailed on slide 24, significant variances impacted fourth quarter non-GAAP operating earnings by a net positive $5 million on both a pre-tax and after-tax basis and $0.02 per diluted share. The significant variances included strong encaje performance largely offset by lower variable investment income. Looking at macroeconomics in the fourth quarter, the S&P 500 daily average was slightly higher than the third quarter of 2023 and 16% higher than the fourth quarter of 2022. While the S&P 500 Index increased 24% from the end of 22, the daily average increased just 4% from the 2022 daily average. In addition, the S&P 500 performed better than mid-cap, small-cap and international equities, as well as fixed income and alternatives. Relative to our 2023 outlook, the daily average increase was lower than our typical 6% price appreciation assumption, but it was higher than expected heading into the year. Foreign exchange rates were a headwind relative to the third quarter, but a tailwind compared to the fourth quarter of 2022 and on a trailing 12-month basis. Margins across the enterprise remained strong as we took actions to reduce expenses to align with revenue, while investing for growth and increasing scalability. On a full year basis, compensation and other expenses increased modestly over 2022 despite elevated severance expense of $20 million in the fourth quarter and $30 million for the full year. Turning to the business units, the following comments exclude significant variances and demonstrate our ability to meet or exceed most of our 2023 guidance ranges. Starting with RIS, fourth quarter pre-tax operating earnings were very strong and increased 22% over the fourth quarter of 2022 driven by growth in the business and strong revenue retention, higher net investment income and favorable markets. Full year net revenue growth of 4% and the 39% margin were at the high end of our guided ranges. Our focus on profitable revenue growth is paying off and was aided by favorable macroeconomic impacts. PGI’s pre-tax margin of 35% for the full year was within our guided range, a strong result compared to many of our peers, reflecting disciplined expense management, while navigating a pressured revenue environment. PGI’s full year revenue growth was slightly below our guided range given the market volatility, as well as the industry trend of money moving to money market funds in 2023. At $34 million for the full year, performance fees ended the year in line with our outlook despite a pressured real estate market. This compares to a very strong year in 2022, which had $70 million. Performance fees are dependent on market conditions as to when we can optimize alpha generation in the portfolio. Principal International ended the year strong with full year revenue growth of 9%, a 32% margin and an 11% increase in pre-tax operating earnings over 2022. Results benefited from growth in the business, higher AUM, positive net cash flow and foreign currency tailwinds. Both revenue growth and margin were within our guided ranges. Specialty Benefits continued to deliver in 2023 with a 9% growth in premium and fees, a 15% margin and a 17% increase in pre-tax operating earnings compared to full year 2022. This was fueled by another year of record sales, strong retention and employment and wage growth, as well as a more favorable loss ratio. All of our metrics for specialty benefits were within our guided ranges. In Life, growth in premium and fees was within our guided range as our focus on business solutions is outpacing the roll-off of the legacy block. Margin was slightly below our guided range primarily due to lower net investment income as we right-sized the assets backing the business post-transaction. Shifting to our investment portfolio, it remains high quality, aligned with our liability profile and well-positioned for a variety of economic conditions. We revalued the office real estate portfolio again in the fourth quarter as we have done quarterly throughout 2023. The commercial mortgage loan portfolio remains healthy. The average loan-to-value of 49% increased modestly throughout 2023, as we expected while the debt service coverage ratio remained stable at 2.5 times, reflecting the quality of our portfolio and our disciplined investment approach. Specific to our office exposure in the CML portfolio, there were 10 loans that matured in 2023, reducing our office loan exposure by 12%. All loans were paid off and resolved. We did not have any loan extensions or foreclosures in 2023. Looking at the 2024 office maturities, the underlying metrics are generally strong, with an average loan-to-value of 66% and debt service coverage ratio of 3.8 times. We only have one maturity in the first quarter and it paid off in January. We’re actively managing and remain confident in the outcome of the remaining 10 maturities, eight of which are slated for the second half of the year. Turning to capital and liquidity, we ended the year in a very strong position, with $1.7 billion of excess and available capital, including approximately $935 million at the holding company, which is above our $800 million targeted level, $375 million in our subsidiaries and $375 million in excess of our targeted 400% risk-based capital ratio, which was 427% at the end of the year. Our capital position and free cash flow reflect robust fourth quarter results and actions we took to increase capital efficiency, including the establishment of an affiliated Bermuda reinsurance entity and the closure of certain guaranteed retirement products in Hong Kong. Combined, these actions freed up more than $200 million of capital in the fourth quarter. On a full year basis, we delivered 100% free capital flow conversion, including organic generation within our 75% to 85% targeted range. As shown on slide three, we returned $1.3 billion to shareholders in 2023, including $700 million of share repurchases and $625 million of common stock dividends. This included more than $400 million of capital returned to shareholders in the fourth quarter, with approximately $250 million of share repurchases and $160 million of common stock dividends. Last night we announced a $0.69 common stock dividend payable in the first quarter, a $0.02 increase from the dividend paid in the fourth quarter and in line with our targeted 40% dividend payout ratio. This demonstrates our confidence in continued growth and overall performance. We remain focused on maintaining our capital and liquidity targets at both the life company and the holding company, and will continue a balanced and disciplined approach to capital deployment. Turning to our outlook for 2024, starting on slide 13, we are well positioned to deliver on our enterprise long-term financial targets in 2024, with 9% to 12% growth in earnings per share and 75% to 85% free capital flow conversion. In regards to EPS, benefits from growth in the business, favorable macroeconomic tailwinds and higher share repurchases are expected to more than offset continued pressure on real estate, Asia and a higher effective tax rate. Our higher growth, higher return and more capital efficient portfolio will continue to drive an increase in return on equity and we expect to achieve our 14% to 16% targeted range in 2025. We remain committed to returning excess capital to shareholders and are targeting $1.5 billion to $1.8 billion of capital deployments in 2024. This includes $800 million to $1.1 billion of share repurchases and a 40% dividend payout ratio. Our Board of Directors approved a new share repurchase authorization for $1.5 billion. This is in addition to nearly $300 million remaining under the prior authorization at the end of the year. Our guidance assumes run rate variable investment income. As usual, we’ll quantify the impacts to reported results from higher or lower than expected variable investment income as a significant variance on our earnings calls throughout the year. Slide 21 provides details of our alternative investments. Our portfolio is more heavily weighted to real estate, with a smaller allocation to private equity and hedge funds. Variable investment income is difficult to predict, but if the current macro environment persists throughout 2024, we expect continued pressure on prepayment fees and real estate returns. Turning to our business units, our outlook for 2024 is grounded in our long-term guidance. We included some modeling considerations on slide 14, noting where we expect to perform on an adjusted basis relative to our targeted long-term ranges. In RIS, benefits from macroeconomic tailwinds and growth in the business are expected to drive revenue growth at the high end or slightly above our long-term guidance, and margin at the upper end of our range. In PGI, revenue growth is expected to be at the lower end of our long-term guidance, as benefits from market tailwinds are partially offset by continued pressure on real estate revenue and impacts from recent redemptions. In Principal International, margin is expected to be in line with 2023 and we’re expecting low single-digit revenue growth, reflecting the impact of foreign currency translation and continued macro headwinds in Asia. While the closure of the guaranteed retirement products will impact revenue and earnings in Asia, Latin America is expected to continue to deliver strong earnings growth. In benefits and protection, we expect favorable loss ratios and Specialty Benefits to persist in 2024 and expect to be toward the lower half of our long-term range. The margin for Life Insurance is expected to be slightly below the long-term range but improve from 2023. Before opening for questions, I want to remind you of a few seasonality impacts. In PGI, the first quarter is typically our lowest quarter for earnings due to the seasonality of deferred compensation and elevated payroll taxes. And in Specialty Benefits, dental claims are typically higher in the first half of the year. These factors contribute to the pattern of free capital flow, which is typically lightest in the first quarter and increases throughout the year. We have good momentum as we start 2024 with a strong capital position and we are well positioned to deliver on our long-term financial targets. We are grounded in our growth drivers of retirement, asset management, and benefits and protection and executing on a strategy focused on continuing to drive long-term shareholder value. This concludes our prepared remarks. Operator, please open the call for questions.

Joel Hurwitz:

Hey. Good morning. I wanted to start on PGI and the outlook for the net revenue guidance. So you talked about being at the low end despite some of the market tailwinds and you referenced some of the real estate headwinds. I guess, can you just talk about your expectation for real estate-related activities in 2024 and how that compares to what you experienced in 2023?

Patrick Halter:

Yeah. Joel, this is Pat, and great to have you on board here. I’ll just make a couple comments and then let Kamal talk a bit more, maybe specifically about flows, because I think that’s part of the nature of your question. As we kind of look forward relative to this year, we are starting to be more cautiously optimistic about our outlook relative to flows, Joel. We started to see more investors in the fourth quarter move into a little more of the risk side of the equation versus keeping money in cash and cash equivalents. I think that was predominantly driven by the fourth quarter in terms of improvements both in the equities and the fixed income market, and our belief that with potential Fed easing later this year, we continue to see a trend, which we are seeing in the first part of this year, of investors starting to engage again in some of our higher value investment activities. But Kamal will provide more input on and specifics on that.

Joel Hurwitz:

Thanks. Very Helpful.

Joel Hurwitz:

Yeah. Thanks. That was very helpful. Best of luck with the retirement, Pat. I wanted to move to pension risk transfer. You did $2.9 billion in 2023, which I think is above the $2.3 billion or $2.5 billion level that you guys had recently talked about a quarter or so ago. Just any comment on what you saw in the market in Q4? I guess, what’s the outlook for 2024 and how does the Bermuda subsidiary impact your growth targets on your more capital-intensive new business?

Chris Littlefield:

Yeah. Thanks. Thanks, Joel. Good morning. Obviously, we had a very strong quarter in PRT and a very strong year overall in our PRT business. We did about $1.2 billion in the fourth quarter and that’s really because we saw an opportunity. There were both capital and onboarding constraints in the industry, and we were able to take advantage of those constraints and put on some really nice PRT business at well above our targeted return levels. So really a great opportunity. We continue to believe we have great advantages in the PRT market, both because of our expertise in DB, the scale that we have, our focus on the small-to-medium-sized type PRT opportunities, as well as our ability to capture our DB clients when they decide to do a planned termination. So if we look at the overall sales in 2023, about 20% of the premium and about 50% of the cases actually came from existing PFG customers. And so that really gives us a nice opportunity to grow our PRT business and the team is just doing an excellent job. As we look forward to 2024, the funding levels of plans remain robust at about 107%, as estimated by Mercer at the end of the year and so we continue to expect to see strong industry sales across PRT. I think the industry is projecting something in the neighborhood of about $40 billion. We’re targeting somewhere in the sort of $2.5 billion to $3 billion range for 2024 and that really is focused on as much about the returns that we’re able to get. We’re not trying to maximize overall PRT premiums. We’re trying to get the best return on the capital that we’re returning -- that we are investing in that business. So feel really, really good about where we sit on PRT. Your last question on Bermuda. I mean, Bermuda is -- Deanna can provide more details, but Bermuda is a nice opportunity for us that we open up in the fourth quarter. It gives us an additional ability to look at capital efficiency, and again, continue to think about how do we get good returns on the capital we put in that business. Hopefully, that answers your question, Joel.

Joel Hurwitz:

Thank you.

Ryan Krueger:

Hey. Good morning. My first question was on Hong Kong. Could you provide some additional detail just on the impact specifically to the exit of the guaranteed product and also maybe a little bit more color on why you decided to do this?

Deanna Strable:

Yeah. Ryan, just a little bit more color there. This was kind of a legacy product that we offered as part of our eMPF Retirement plan, but as Dan mentioned, it was more capital intensive than other investment options and it was not meeting the return thresholds that we really wanted. So, we looked at an opportunity to exit that business. And just to talk a little bit about the impact. Those products had about a $1 billion in AUM. We actually retained about $800 million to 900 million of it in other asset classes that did not have the same capital implications to it and $200 million actually left Principal. If you actually look at the AUM roll forward, you’ll see $200 million in that operations dispose line, which is really the impact of that. From a financial perspective, it had the benefit of releasing some capital in the fourth quarter. Think about magnitude of $30 million to $40 million. We actually expect a similar amount of relief on that same block early in 2024. Obviously, that is positive from a capital implication perspective, but it does have an impact on our revenue and operating earnings as we think of 2024 and we’ll pressure on a pre-tax basis our Hong Kong earnings at about $10 million.

Dan Houston:

Yeah. Another key market for PFG for sure. Chris, want to provide some additional insights there?

Dan Houston:

Hopefully, that helps, Ryan.

Operator:

Our next question is from Suneet Kamath with Jefferies. Please proceed with your question.

Dan Houston:

Yeah. Go ahead.

Suneet Kamath:

Okay. That’s helpful. And then I guess shifting to RIS fee, so one of the things that we’re hearing from, I guess, one of your peers is that, as participants reach retirement age, they’re actually starting to take money out and put it into products that have higher yields, I’m assuming it’s rollover into fixed annuities or fixed indexed annuities. So can you -- I know you give us the lapses and withdrawals on a consolidated basis, can you just give us some color on what you’re seeing at kind of the participant level? Are you seeing a pickup in withdrawals and maybe how current trends compare to recent years?

Chris Littlefield:

Yeah. Thanks for the question. Yeah. I would say that we saw in 2023 a modest increase in participant withdrawals primarily due to overall retirements than due to either loans or withdrawals. And so we are seeing a modest increase in the withdrawal rates there on the participants. But that being said, again, when you look at the participants, we’re also seeing really healthy underlying fundamentals. We’re seeing deferrals are up significantly over 8%. Matches by employers are up. So we’re seeing a lot of things that are feeding overall growing, the recurring and the account value growth, but we definitely are seeing an increase in some retirements -- a modest increase in retirements.

Suneet Kamath:

Thanks.

John Barnidge:

Good morning. Thank you very much for the opportunity. My question is around the severance. Was there a lens towards looking at more greatly unified operations of PI and Principal global investors now that we’re further into the shared umbrella of Principal Asset Management?

John Barnidge:

It does. Thank you very much. And my follow-up question, lots of companies have been calling out the opportunity for supplemental voluntary products as a growth vertical. Can you maybe talk about the opportunities set for your company, as well as general product development pipeline for benefits?

Amy Friedrich:

Yeah. Thanks for the question, and, Dan, you’ve got it right. There’s a -- there is an appetite for these products. There’s a need for them. What I would say is, most people see the use of these supplemental products not as a replacement for some of the core coverages they’re putting in place. So we’re still seeing a high interest in getting core income replacement products done. Small- and mid-sized businesses are still taking care of their major medical needs. But we’re adding on these critical illness, the accidents, the hospital indemnity to help cover the things that aren’t covered by some of the other pieces of insurance. So when you look at like a high deductible plan that you’d have to get up to $7,500 before the plan would kick in to help pay, it’s helping meet some of those expenses. So what I would say is, these products in our portfolio make a ton of sense and you’ve seen us add critical illness, you’ve seen us add accidents and you’ve seen us add most recently hospital indemnity. That’s giving us the ability to have a worksite portfolio that helps complement the things that they’re doing. We’re expecting and are seeing growth in excess of 15%, up to 20% on those product sets. Now our base on those sets is pretty small, but it’s responsive to the marketplace. The last point I would offer is, those are also giving us the ability with the type of financial security in place that if people have those benefits in place, they’re better able to participate in some of the other programs like saving in a 401(k) or investing in the places that make sense for them as an investor. So that if you’ve got these products in place, then our ability to extend to other pieces of Principal’s great product set is even higher.

Dan Houston:

Thanks, John. Thanks for a good question.

Tom Gallagher:

Good morning. Let’s see, a couple of questions. First is just on alternative returns. I think you’re assuming in line with your long-term expectation, but then there was a footnote just saying, if current conditions persist in real estate in particular, you would -- I guess, potentially you’re going to come in below that. Can you just sort of clarify what you’re thinking on that? Do you -- would you expect alternatives to be softer in 1Q or 2Q based on what you’re seeing today?

Deanna Strable:

Yeah. Tom, thanks for the question there. The first thing I would reiterate is our ranges that we’ve put out there for margin and revenue growth are all on an ex-significant variant basis, and obviously, the last few years, variable investment income has been one that we have called out as it has run below our actual level. Just to put that in a little bit of perspective, our run rate return for our alt portfolio is in that 8% to 8.5% range and we actually came in in 2023 more in that 6% to 7% level, and we did provide on the slide deck an actual breakdown of our alternative portfolio, which is about a $5 -- a little over a $5 billion portfolio. So given kind of the difficulty in actually predicting that, we felt it was prudent to give you guidance on a run rate basis. And also because we actually see a path to getting to that run rate basis either late in 2024 as we think about 2025, and I know you’re aware, but our alt portfolio is more weighed or heavily concentrated in real estate and has less allocation to private equity and hedge funds. If we think of 2023, we actually -- the places where we fell below our expectations was pre-pays, not surprising given the interest rate environments and the elements of our bond portfolio and also real estate, which again, more of ours comes from real estate transactions and 2023 was obviously not at time to actually take advantage of that. Our alt portfolio -- our private equity and hedge actually performed better than we expected, and again, helped to offset some of the impact that we saw there. So one of the things that, again, it’s probably easier to think about the next quarter or two than it is the full year, pre-pays in real estate transactions will probably run below our expectations, but it’s interesting if we actually did have BII be at the same level that we experienced in 2023, our reported EPS would actually be in that 9% to 12% growth rate as well as our adjusted and our outlook. So hopefully that gives you a little bit more color.

Deanna Strable:

Yeah. I think, probably, Kamal and Chris would be in the best position to talk through that.

Patrick Halter:

Yeah. So I think from a look-forward perspective, Tom, we’re seeing improvement from 2023. As Kamal highlighted, we’re seeing improvement in our broad range of investment activities, starting with fixed income and we think fixed income is going to be a benefactor and a recipient of the Fed policy actions that we believe in are assuming to occur later this year in terms of sort of a Fed easy. So that’s the first sort of protocol relative to I think flows coming in a more positive direction in 2024. Kamal highlighted our real estate. We still have a very balanced approach in terms of what we can do in real estate, both in terms of the pipeline and the opportunities, both in debt and data centers and other specialized investment activities. We don’t talk about this enough, but Europe is actually a very active place for us right now also in terms of real estate and so that’s an area just to highlight, and we have some emerging opportunities in Asia and future to talk about. And then, I think, in terms of what Kamal highlighted, just to sort of, again, reiterate, we see some really strong interest in equity activity, particularly in the small and midcaps. So but to round it out, I will let Kamal sort of finish out sort of the things that we didn’t discuss.

Dan Houston:

Chris any color?

Dan Houston:

Thanks for the question, Tom.

Operator:

Our next question is from Jimmy Bhullar with J.P. Morgan. Please proceed with your question.

Patrick Halter:

Yeah. I mean, I think, what I’d say is, we’ve previously talked on calls about the competitive environment remains competitive on flows. We’ve also talked about us wanting to make sure that we have the right plans that we have in our portfolio and are very focused on making sure that we have profitable plans. I think you’ve seen in the past year and a half, two years, we’ve had some large plans leave that have had very negligible impact on net revenue. And so, again, our focus is on revenue, not flows and it will remain that way as we go. Flows is an important measure for us to look at, but we’re trying to remain disciplined in the business that we put on. And again, I’d also say, the fourth quarter is historically a negative quarter. As we look into 2024 and the first quarter particular, we see positive net cash flow in the first quarter and significantly above last year’s first quarter. So, again, we’re watching flows. It’s an important dynamic for us, but we’re really, really focused on finding all the ways that we can generate revenue across our platform, as well as focusing on those plans that are healthy and profitable for us to continue to maintain.

Dan Houston:

Yeah. I appreciate that. And just to pile on Chris’ response there, don’t discount the value creation of what Chris and his team have done around improving the customer experience, continuing to build out total retirement solutions, our ability to gather assets for the asset management part of the organization and feed the rest of the organization. So from our perspective, it’s a very valuable franchise, and Chris and his team have done an excellent job ensuring that the business we serve is a profitable business. We don’t need practice and record keeping. So that as it relates to Chile, as you know, this has been an ongoing reform discussion. It’s been going on for years. The constitutional reform was not successful. One of the outcomes of that was further conversations around pension reform and we start with doing what’s in the best interest of Chilean people. And right now what they tell us through surveys and feedback is they want a choice in their provider, they want choice in investment options, and this has been very consistent. So, in fact, effectively, Chileans have rejected the idea of a state-owned AFP providing more value than what the private sector has. So we continue to be very vigilant, working with regulators, working with the legislators and continue to work in the industry to make sure that what is available in the AFP is competitive from a feed perspective, the investment options, which it is, and continue to serve the best interest of Chileans. But again, we feel reasonably confident on the industry’s ability to demonstrate that and make our case to elected officials. Appreciate the question.

Operator:

Our next question is from Alex Scott with Goldman Sachs. Please proceed with your question.

Dan Houston:

Chris?

Alex Scott:

That’s helpful. Thank you. Next one I have is on the commercial mortgage loan portfolio. I was just interested if you could talk about maturities you have this year. I know you gave some numbers in the deck. So I’d just be interested in color around how that’s going, working through those maturities. And if there’s anything we should think about as it relates to the, I guess, it was around 7% of the office portfolio that’s getting closer to 100 LTV with debt service coverage under 100, sorry, under 1.

Patrick Halter:

Yeah. Thanks for the question, Alex. Obviously, real estate and office in particular is under the radar screen and we are absolutely laser focused on our portfolio and ensuring it’s being valued, it’s being underwritten and it’s being monitored and managed appropriately. Just to level set a little bit, Alex, we have about $3 billion remaining in our overall commercial mortgage loan portfolio that’s in office. High quality office, Class A predominantly, 60% loan-to-value, and then office portfolio, that’s where the 30% reduction already in valuations. As you know, we appraise, and Deanna highlighted this earlier, we appraise our office portfolio on a quarterly basis. So, that’s a current loan-to-value, 2-point time -- 2.6 times debt service coverage and that portfolio is 89% occupied currently. Specifically, to your question, Alex, we have 11 loans that are maturing in 2024 in the office category, and as highlighted earlier, one of those loans already has paid off. But we really are going into that portfolio with a very strong position. The remaining 10 loans, 66% loan-to-value. But what I really want to highlight are three things; one is the debt service coverage ratio, which is 3.8; secondly, it’s 94% occupied in terms of that portfolio; and thirdly, the lease term is 5.6 years remaining in that office portfolio. So that $440 million remaining that is expected to mature for the remaining part of 2024, three of those loans are under $6 million in loan balance. So that remains seven loans, of which, as I think Deanna highlighted, 80% of those loans are going to be maturing in the second half of the year. As I mentioned, we do intensive underwriting each one of those loans. Of those seven loans, we don’t see any sort of issues at this point in time relative to any credit losses and they are all current and paying, we have a lot of institutional investors in some of those loans. Again, high quality loan portfolio and with the sort of going in debt service coverage ratio occupancy and the long-term lease is still remaining in that overall portfolio, we continue to feel fairly good about the portfolio as we move it forward into the year. We’ll continue to monitor that very closely. The last thing you highlighted, Alex, was there are, I think, we provided in the deck, there’s a small portion of our overall portfolio. I think it’s about 1.5% of our overall portfolio, about 6.7% of the office portfolio, so about $200 million. That equates to about $200 million. That’s in four loans. We continue to monitor those very, very carefully. We see probably one stress point in one of those loans today. So we could see a minor loss reserve in one of those loans as we look forward in the next quarter. But that’s all we see at this point in time, but we’ll continue to monitor those loans also. But the portfolio is in a very good place, it’s in a good shape right now, but clearly we have to be respectful of the challenges in the marketplace and the liquidity and the headwinds that continue to remain probably for the next couple quarters. Thanks for the questions, Alex.

Operator:

Thank you. Our last question is from Josh Shanker with Bank of America. Please proceed with your question.

Dan Houston:

Amy, please.

Josh Shanker:

And is that lower end life and disability driven or it’s the whole kit and caboodle is going to be at the lower end?

Josh Shanker:

Okay. Thank you.

Operator:

Thank you. We have reached the end of our question-and-answer session. Mr. Houston, your closing comments, please.

Operator:

Thank you. This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation.

Humphrey Lee:

Thank you and good morning. Welcome to Principal Financial Group’s third quarter 2023 conference call. As always, materials related to today’s call are available on our website at investors.principal.com. Following a reading of a Safe Harbor provision, CEO, Dan Houston and CFO, Deanna Strable will deliver some prepared remarks. We will then open up the call for questions. Other members of Senior Management will also be available for Q&A. Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company’s most recent annual report on Form 10-K filed by the company with the US Securities and Exchange Commission. Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable US GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. We’ll be hosting a combined fourth quarter 2023 earnings and 2024 outlook call on February 13th. We will share more details early on next year. Dan?

Deanna Strable:

Thanks, Dan. Good morning to everyone on the call. This morning, I will share the key contributors to financial performance for the quarter. Details of our current financial and capital position and an update on our commercial mortgage loan portfolio. We reported net income of $1.2 billion in the third quarter, reflecting more than $700 million of income from exited businesses. This benefit was primarily due to a change in the fair value of the funds withheld embedded derivative, which doesn’t impact our capital or free cash flow and can be extremely volatile quarter-to-quarter. Excluding the income from exited businesses, net income was $544 million with minimal credit losses of $6 million. We also had minimal impacts from credit drift in the third quarter. Year-to-date, total credit drift and losses were a manageable $41 million, which is better than our expectation at the beginning of the year. Excluding significant variances, third quarter non-GAAP operating earnings were $446 million or $1.83 per diluted share. EPS increased 14% over the third quarter of 2022, demonstrating the strength and resiliency of our diversified business model. On a year-to-date basis, EPS excluding significant variances, has increased 5% over 2022 compared to our 3% to 6% guided range. As detailed on Slide 11, significant variances impacted our third quarter non-GAAP operating earnings by a net positive $40 million pre-tax, a net negative $27 million after-tax and $0.11 per diluted share. The significant variances included impacts from the actuarial assumption review, lower-than-expected variable investment income in RIS, Life and Corporate as well as impacts in Principal International, including lower-than-expected encaje performance and better-than-expected impacts of inflation. The assumption review had a net positive $63 million impact on pre-tax operating earnings. This was primarily driven by experience adjustments in RIS and Specialty Benefits, including updates to PRT mortality assumptions, group and individual disability morbidity assumptions as well as model refinements in Life. The after-tax impact was a negative $6 million as the pre-tax benefit was more than offset by a one-time tax impact resulting from a PRT tax reserve methodology change. RIS and Life’s third quarter pre-tax operating earnings, excluding significant variances, reflect the run rate impacts from the assumption review. There are no material run rate impacts in Specialty Benefits. In total, variable investment income was positive for the quarter and improved from the first half of the year, but it was lower than our run rate expectation. While VII benefited from improvement in real estate sales and alternative investment returns, prepayment fees remain immaterial. Looking at macroeconomics in the third quarter, the S&P 500 daily average increased 6% from the second quarter and 12% from the third quarter of 2022, benefiting third quarter results in our fee-based businesses. While the daily average increased markets retreated in the second half of the quarter, the S&P 500 closed nearly 4% lower than the second quarter and fixed income returns were negative as well. This impacts revenue, earnings and margins for our fee-based businesses. Foreign exchange rates were a slight headwind on a quarterly basis relative to the second quarter, a slight tailwind compared to the third quarter of 2022 and immaterial on a trailing 12-month basis. In RIS, benefits from strong expense management as well as favorable equity market performance and higher interest rates were partially offset by fee compression. Excluding significant variances, net revenue increased 4% compared to a year ago and margin was strong at 39%. PGI benefited from real estate performance fees in the quarter, driving a 6% increase in revenue over the third quarter of 2022 and improved the margin to 39%. Specialty Benefits pre-tax operating earnings, excluding significant variances, increased 32% over the year ago quarter. This was fueled by growth in the business, strong long-term disability underwriting experience and lower group life mortality. The third quarter adjusted margin was strong at over 17%, which was more than 300 basis points higher than the third quarter of 2022. As we look to the fourth quarter, I want to remind you that our enterprise compensation and other expenses are typically higher due to the seasonality of certain expenses. We expect less of an impact this fourth quarter than the typical 7% to 10% and as we’re focused on managing expenses in the challenging and volatile macro environment. Shifting to our investment portfolio, it remains high quality, aligned with our liability profile and well positioned for a variety of economic conditions. We revalued the office real estate portfolio again in the third quarter. The commercial mortgage loan portfolio remains healthy. The current loan-to-value and debt service coverage ratios are strong at 47% and 2.5 times. Specific to our office exposure in the CML portfolio, all year-to-date maturities are resolved, and we are confident in the outcome of the one small remaining office loan maturing in the fourth quarter. Looking ahead to 2024 office maturities, the underlying metrics are strong with a 63% loan-to-value and debt service coverage ratio of 3.8 times. We are confident in the outcome of the 11 maturities in 2024, of which, only three are slated for the first half of the year. Turning to capital and liquidity, we are in a strong position with $1.4 billion of excess and available capital, which reflects the benefit of negative IMR and includes approximately $940 million at the holding company, which is above our $800 million targeted level, $360 million in our subsidiaries, and $50 million in excess of our targeted 400% risk-based capital ratio. We returned more than $350 million to shareholders in the third quarter, including $200 million of share repurchases and $156 million of common stock dividends. Last night, we announced a $0.67 common stock dividend payable in the fourth quarter. This is a $0.02 increase and aligns with our targeted 40% dividend payout ratio. Given our current capital position and strong free capital flow, we are increasing our full year share repurchase expectation to approximately $700 million, $100 million higher than previously expected. Combined with common stock dividends, we now expect to return $1.3 billion of capital to shareholders for the full year. We remain focused on maintaining our capital and liquidity targets at both the Life company and the holding company, and we’ll continue a balanced and disciplined approach to capital deployment. We are committed to maximizing our growth drivers of retirement, global asset management and benefits and protection, which will continue to deliver long-term growth for the enterprise and long-term shareholder value. This concludes our prepared remarks. Operator, please open the call for questions.

Ryan Krueger:

Hey, guys. Good morning. My first question was on real estate. And you mentioned a couple of real estate opportunities that you have some visibility on. I just – I guess my question is, you did $800 million in real estate flows in the quarter. Do you think that type of pace is more reasonable now as we move forward? Or can you give any more color on your expectations there?

Pat Halter:

Yeah. Ryan, thanks for the question. As you highlighted, third quarter, we did have a $800 million net cash flow in real estate. That was from predominantly the institutional marketplace and that was double the prior quarter in terms of net cash flow. To your question, we continue to see an active pipeline and an active opportunity to selectively deploy the $6 billion of committed capital that has not been invested yet in our pipeline as we look forward. And I would expect in the fourth quarter to continue to see a very consistent pace like we saw in the third quarter in terms of real estate net cash flow, Ryan.

Dan Houston:

Please, Pat.

Dan Houston:

So, Ryan and Pat, the only thing I might add to that on that preferred securities mandate, they took that in-house in spite of very strong performance from our preferred spectrum asset management. So again, it was a tough loss for us, especially considering the strong performance. Next question, operator?

Jimmy Bhullar:

Hey, good morning. So first for Pat, PGI performance fees were very strong in the third quarter. And if you could just give us some color on what drove that and what your outlook is either over the next quarter or over the next year? Because I would have thought that performance fees would have suffered in this type of an environment, but obviously, the quarterly number was very good.

Pat Halter:

Yeah. Jimmy, thanks for the question. As you’ve heard me in prior comments, we always have a large pipeline of different investments that are at different stages of maturity in terms of harvesting gains or performance fees. And as you can imagine, performance fees are relatively lumpy, depending on market conditions and when we can optimize the actual sort of hopefully alpha generation that we see in the real estate portfolios that we’re managing. We did have a $22 million gross performance fee in the third quarter. That was in two different transactions. As we look forward, we probably think that the first half of the year where we saw performance fees, which were muted, we’ll probably see that in the fourth quarter. But I would suggest to you that as we look into 2024, if the market conditions provide an opportunity for us. We still have confidence that as we’ve indicated in past discussions that we should expect performance fees to be in the $30-plus million range which has been a consistent guidance and a consistent realization of where we’ve seen performance fees, probably in the second half of 2024 versus the first half of 2024, but we continue to believe we have a diverse portfolio of different investment strategies that can be harvested in the future years.

Dan Houston:

Hey, Jimmy, let me make just a couple of really quick comments before handing it over to Chris. First thing I want to do is, thank Chris for his leadership in advancing our domestic retirement strategy. It’s a challenging environment out there. He’s done an amazing job, recruiting talent from the industry and leveraging our existing talent. Our focus still remains on small, mid and large plans. Each one of those have different characteristics that can be volatile. But most importantly, our continued doubling down on our abilities to create a unique TRS solution for defined benefit, defined contribution, ESOP and non-qualified. And certainly, we’ve seen some volatility in these businesses, but I’d like to think that in large part, the integration has taken place and Chris is growing it from here. So Chris, can you please respond?

Jimmy Bhullar:

Thank you.

Operator:

Thank you. Our next questions come from the line of Suneet Kamath with Jefferies. Please proceed with your questions.

Deanna Strable:

Yeah. Thanks, Suneet for the question. From a run rate perspective, it does cause a slight benefit in RIS, a slight pressure in Life, no impact in SPB. I think it is of note though that those would be reflected in the third quarter run rate operating earnings that we gave you on a pre-tax basis. So those have all been kind of factored in. As we move to capital, the tax item did cause a capital hit. And so that was unknown, and we had slightly positive offsetting – modest positive capital impact that offset a portion of that from the AR. But ultimately, those would be the moving pieces. From a tax perspective, no ongoing impact that was a one-time impact that really trued up and reversed some credits that we had taken in previous years. And so no impact as we go forward.

DanHouston:

Sure. Amy, please.

Dan Houston:

That helps, Suneet?

Dan Houston:

Appreciate the question.

Alex Scott:

Hi. I wanted to see if you could talk a bit about the margins and just the sustainability of margins that are running at a pretty nice level just partly probably driven by the recovery in some AUM over the last couple of quarters or a few quarters. And how should we think about your ability to hold on to some of that and kind of keep the flexibility versus some of the pressures from inflation, obviously, ongoing and so forth. Any way to think through that in terms of the more short-term targets that you guys communicated?

Deanna Strable:

Yeah. I’ll frame it in total. And then Alex, if you have some specific businesses that you want to go into a little bit deeper, you can bring that up and we can pass on to the appropriate President. It was a very strong margin quarter across almost all of our businesses. I’d say we obviously were benefiting relative to outlook from some of the early in the year market strength. And as you know, some of that did retreat as we went through the third quarter and in the fourth quarter. The other thing I would say is that, we did mention on the prepared remarks that we do have some seasonality in our expenses. We do expect that to be less than typical, but you will see some impact on fourth quarter margins from that as well. That does impact all businesses with a slightly larger impact in our retirement business. But I think the good news is bringing us back to the full year, we do still feel really good about our targeted margins. And ultimately, we will be laying out kind of our expectations for 2024 in the February outlook call. But we continue to be very targeted and focused on maintaining those margins and doing what we need to do to keep us in those levels.

Alex Scott:

Yeah. The follow-up I had is on PGI. I wanted to ask about just the broad industry pressure that active asset management is facing. And what are the strategies that you all are deploying to be able to sort of resist some of those pressures? And anything nuance that you’re working on there to help flows?

Kamal Bhatia:

Sure. Thanks, Dan. Thanks, Alex. Yeah. I’ll give you a perspective, Alex, on where we see client engagement and client sentiment, because that’s the best measure of where we see the industry going. I would probably highlight for you two dimensions here. One, I think, as Dan talked about, most investors have been very well rewarded and they’ve been smart, particularly when it comes to achieving their goals by taking less risk and focusing on coupon yields. As you know, we are getting a lot of interest on our specialty income capabilities. And the reason we are seeing more and more of that recently is, because a lot of investors are now focusing on total return solutions rather than simply looking at the coupon yield. Most of these institutions and including some of our wealth management partners really realize that we are probably at an early dawn of a long cycle with a total return capability would probably benefit them, and that is certainly something we have great performance and great capability on. The second piece, as you’ve seen is, we continue to do extremely well in our real estate franchise, but we tend to have a lot more conversations on private markets. And one of the things that’s driving that continued engagement and our confidence in future success is, we have some very, very long tenured strategic relationships. And as we go through this market cycle where there is a desire to work with partners that have experienced through transition and discovery, Principal Asset Management is well positioned and there are a couple of reasons for it. One is, we have this amazing capability to work across public and private markets, which is important during these times. We also have a true understanding between debt and equity, and we can offer a full service solution to them. And I would highlight that we have had a continuing excellent culture of client service with some of these large relationships that continues to benefit us. So as you highlighted, the active management space is stressed, but we do have some capabilities that give us high confidence from that perspective.

Alex Scott:

Yeah. Thank you for all the detail.

Operator:

Thank you. Our next questions come from the line of Wilma Burdis with Raymond James. Please proceed with your questions.

Dan Houston:

Yeah. And I’ll have Deanna take that one. Thanks.

Wilma Burdis:

Okay, thank you [technical difficulty]. And then the adjusted benefit ratio in Specialty Benefits was 58%, which was better than your targets and improved 4 points year-over-year. It sounds like the group disability could continue to outperform in the near-term, but could you go into the other drivers and what we should expect in the coming quarters?

Amy Friedrich:

Yeah. So, Wilma, as you’ve noted, the group disability one is probably one of the bigger drivers that’s giving us that overall result. And again, as we’ve talked a little bit about, some of that will continue. I do think that third quarter is not repeatable in terms of when you adjust out the AAR, you’re looking at that almost 46% loss ratio. That’s not something that will continue, but we will see some improvement from those historical levels. The other piece I would say is Group Life, is continuing to perform really, really well. I made a point in an earlier question to talk a little bit about our focus on those knowledge industries, I do think that tends to have a little bit of impact in Group Life as well. So the type of business that you’ve built over time and the type of patterns you see against that business really do matter. And so, I would expect Group Life to continue to perform pretty well. Dental has been one that we have been seeing a little bit more utilization and severity over the last year, year and a half since COVID. It’s been one of those we’re trying to kind of find that next normal pattern. I do see it beginning to kind of slowly return to those patterns that we used to see prior to COVID, we’re always willing to make some modest pricing adjustments to make sure we’re continuing to be good stewards of that line of business. But I would expect to see that to continue to have probably even a little bit better performance than we saw in the trailing 12-month number from that. And then our supplemental health line, I would continue to expect to see the type of performance that we’ve seen from that in the past and then individual disability could also see some of those benefits we’ve talked about, but I would continue to see it performing consistent with some of those historical levels.

Wilma Burdis:

Yeah. Thank you.

Wesley Carmichael:

Hey, good morning. So last quarter, I think you talked about you expected variable investment income to be a little bit below normal levels for the remainder of 2023. And are you still expecting that into the fourth quarter? And maybe just if you think that could persist in 2024 or when you expect that to turn around?

Deanna Strable:

Yeah. I think when you look at 3Q relative to what we saw in first quarter and second quarter. The real improvement came because we did see some real estate sales in the quarter that then transferred into that variable investment income. As I look forward to the fourth quarter, I think you probably – it is hard to predict, especially given the volatile market that we have. But probably expect to see fourth quarter be closer to 1Q and 2Q levels as we sit here today. For 2024, I’ll defer to more detail on the February outlook call. But I do think it is obvious to understand that as the interest rates continue at this high level, we’re going to continue to see ongoing pressure from prepays. And it’s really the other alts and the real estate that can be volatile quarter-to-quarter.

Dan Houston:

Yeah. The only thing I just want to say before Amy delves into this is, what an outstanding job she and her team have done in pivoting from that retail franchise with the divested businesses, the reinsurance agreements. And there is going to be a little volatility there, but the business owner executive solutions and NQ business has really been powerful for the organization and really complementary to the entire platform. But Amy, you want to take on the loss ratios here?

Wes Carmichael:

Thank you.

Operator:

Thank you. Our next questions come from the line of Tom Gallagher with Evercore ISI. Please proceed with your questions.

Dan Houston:

Yeah. Tom, I appreciate the question. I’ll have Chris take that one on.

Dan Houston:

Did that help, Tom?

Chris Littlefield:

No. Thanks, Tom. No, again, I think throughout the year, we’ve definitely benefited from equity markets that’s pushed our fee rate around 40 bps the last few quarters. But as we’re seeing the compression – metering in line with our guidance. We’ve historically guided that we expect fee compression annually to be at sort of the 2 to 3 bps reduction a year, which is driven by competitive market dynamics, both acquiring new business, retaining existing customers, having higher price plans, lapse versus and newer ones coming in at lower fee rates. So that’s the compression that we sort of put in that 2 bps to 3 bps a year reduction. This year – this quarter, it was about 2 bps versus a year ago. So that’s what you’re seeing. And while the fee revenue rate is down a bit, keep in mind that how we manage this business, we also have lower expenses, and we’re delivering higher margins, consistent with how we’re really managing this business for the future.

Tom Gallagher:

That makes sense. Thanks, guys.

Operator:

Thank you. Our next questions come from the line of Tracy Benguigui with Barclays. Please proceed with your questions.

Dan Houston:

Pat, any insights here?

Tracy Benguigui:

No, it helps for sure, because it feels like then your LTV is probably more realistic and less scale than maybe what others report given that diligence. But just wondering where that 63% could go from here if I look at the next few quarters.

Tracy Benguigui:

Got it. We’re seeing traditional Life and annuity insurers borrowing a page from the playbook of alternative asset managers and they’re creating these side cars in Bermuda by making an equity stake alongside consortium of investors as a way to accumulate assets and earn fee income. I’m wondering what your thoughts are given you do have large asset management capabilities.

Deanna Strable:

Yeah. Tracy, good question. We always evaluate opportunities to create value for our customers and opportunities and look at what our competitors are doing relative to that. We have been exploring whether we should set up a Bermuda entity specifically focused on PRT and term, our focus will be on new sales as we go forward. And we won’t – we aren’t considering a sidecar arrangement relative to that. One, given the size of our portfolio, the size of our new sales and our ability to manage that in-house relative to that. So there’ll be more to come on that as we go forward, but I always want to be mindful to make sure that we are being as capital efficient as we can in creating value for our shareholders.

Tracy Benguigui:

Thank you.

Josh Shanker:

Yeah, thank you. So the timing of the $0.02 dividend rate also comes in concert with a $100 million increase to the buyback expectations. It seems that you were a bit surprised by just how much cash flow you’re generating. To what extent are you – is that a number that should generally be forecastable for you over time? And can you go through some of the history when you did the Talcott deal about how much it reduced your cash flow by and when you recover to the levels where you’re going to be raising dividends again?

Deanna Strable:

Yeah. Thanks, Josh for the question. We came out of the strategic review and really committed to that 75% to 85% free cash flow ratio, and we managed to make sure that we’re within that. We were happy to be able to raise our dividend $0.01 last quarter and $0.02 this quarter. And as you’re aware, that has been on pause since our strategic review as we wanted to understand the impact on our earnings level. And then, as you know, also in 2022, the markets were pretty negative. And so we needed to understand how we could get through that as well. We did have a few one-timers in the quarter that did help our free capital flow. They netted to about $100 million positive impact. The two most notable one is the admittance of the negative IMR, but that was partially offset by the AAR tax impact that we talked about. And so again, I feel really good about the ability to increase our common stock dividend, increase our share buyback expectations and put us on track for a $1.3 billion of capital return to our shareholders for the full year of 2023. I don’t think what we’re seeing this year is an anomaly and ultimately still stay focused on that 75% to 85% free cash flow conversion.

Deanna Strable:

Yeah. I mean, obviously, the markets can have some fluctuation on that. But I think you can even go back to prior to the transaction and look at our trend of dividend increases. And we did have a consistent pattern of increases. The other thing I would say is, we have high-growth operations in our Specialty Benefits business. We have high-growth expectations in our international business. And I come back to the fact that we have – we think we can deliver 9% to 12% EPS growth. That won’t always be at that level. There will be some years where it’s slightly lower, some years where you might benefit more from macro. But again, I come back to strong free cash flow. We are committed to being a growing company, and we are committed to returning that growth back to our shareholders. And ultimately, in pressured time because of our diversified model relative to pure asset managers, we’re actually able to have consistent dividends versus a lot of volatility. So, I like the pattern and the consistency. And as you say, over the long-term, you’re right, we should be able to increase that dividend and return to our shareholders.

Operator:

Thank you. We have reached the end of our Q&A. Mr. Houston, your closing comments, please.

Operator:

Thank you. This does conclude today’s conference call. You may disconnect your lines at this time, and we thank you for your participation.

Humphrey Lee:

Thank you, and good morning. Welcome to Principal Financial Group's Second Quarter 2023 Conference Call. As always, materials related to today's call are available on our Web site at investors.principal.com. Following a reading of the safe harbor provision, CEO, Dan Houston and CFO, Deanna Strable, will deliver some prepared remarks. We will then open up the call for questions. Others available for Q&A include Chris Littlefield, Retirement and Income Solutions; Pat Halter, Asset Management; and Amy Friedrich, Benefits and Protection. Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K filed by the company with the U.S. Securities and Exchange Commission. Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable US GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. Dan?

Deanna Strable:

Thanks, Dan. Good morning to everyone on the call. This morning, I will share the key contributors to financial performance for the quarter, details of our current financial and capital position and an update on our commercial mortgage loan portfolio. Our second quarter results demonstrate the strength and resiliency of our diversified business model. Despite real estate-related market pressures on a number of key metrics, including total company variable investment income, as well as PGI net cash flow and revenue, we're starting to see signs of recovery and positive momentum in real estate in the broader investor market. Reported net income was $389 million in the second quarter. Excluding income from exited businesses, net income was $325 million with manageable credit losses of $37 million. Credit drift was a positive $5 million in the quarter. On a year-to-date basis, credit drift has been a slight benefit to capital. We still feel good about our full year expectations for credit drift and losses despite the banking sector challenges earlier this year. Excluding significant variances, second quarter non-GAAP operating earnings were $415 million or $1.69 per diluted share. As detailed on Slide 12, significant variances had a net negative impact on our second quarter non-GAAP operating earnings of $53 million pretax, $39 million after tax and $0.16 per diluted share. The significant variances included lower than expected variable investment income in RIS, Principal International and Benefits and Protection as well as unfavorable impacts in Principal International from inflation and noneconomic LDTI discount rate impacts. Variable investment income was positive in total for the quarter and at a similar level as the first quarter. Prepayment fees and real estate sales were immaterial, causing VII in total to be lower than our run rate expectation. Macroeconomics were generally favorable in the second quarter as the S&P 500 daily average increased 5% from the first quarter and 2% from the second quarter of 2022. The benefit to our fee based businesses from this positive performance was partially offset by a decline in daily averages for small cap, mid-cap and international equities as well as fixed income. Foreign exchange rates were a modest tailwind on a quarterly basis relative to the first quarter and the second quarter of 2022, but remain a meaningful headwind of $12 million pretax on a trailing 12 month basis. We continue to focus on managing expenses with pressured fee revenue across the enterprise. Through these efforts, compensation and other expenses have decreased at the enterprise level compared to a year ago despite inflationary pressures on salary levels and other expenses. As a reminder, comparisons to a year ago are impacted by the reinsurance transactions that closed in the second quarter of 2022. Excluding significant variances, revenue growth and margins across the businesses were in line with our second quarter expectations and within our guidance ranges with the exception of PGI revenue growth. Compared to a year ago, PGI performance fees and transaction and borrower fees were down approximately $50 million on a gross basis, pressuring revenue, margin and pretax operating earnings. This decrease was anticipated in our full year guidance ranges. PGI's quarterly margin of 35% was within our 34% to 37% guided range and improved from the seasonally low first quarter. Specialty Benefits pretax operating earnings, excluding significant variances, increased 29% over the year ago quarter, fueled by growth in the business, including an 8% increase in premium and fees and improved loss ratios driven by strong underwriting and disability and group life. Turning to capital and liquidity, we remain in a strong financial position. We ended the second quarter with $1.2 billion of excess and available capital, including approximately $800 million at the holding company, which is at our targeted level, $340 million in our subsidiaries and $100 million in excess of our targeted 400% risk based capital ratio. We returned $255 million to shareholders in the second quarter, including $100 million of share repurchases and $155 million of common stock dividends and we retired $700 million of long term debt during the quarter using the proceeds from issuances in the first quarter. As expected, we generated strong free capital flow in the second quarter and remain focused on 75% to 85% free capital flow conversion for the full year. Last night, we announced a $0.65 common stock dividend payable in the third quarter. This is a $0.01 increase and is in line with our targeted 40% dividend payout ratio. We remain focused on maintaining our capital and liquidity targets at both the life company and the holding company, and we'll continue pursuing a balanced and disciplined approach to capital deployment. As shown on Slide 5, our investment portfolio remains high quality, aligned with our liability profile and well positioned for a variety of economic conditions. Specific to our real estate portfolio, it is high quality and positioned well to withstand potential economic stress. We revalued the portfolio again in the second quarter, reflecting the most recent cash flows and other underlying data. The commercial mortgage loan portfolio remains healthy. The current average loan to value is low at 47% and debt service coverage ratio is strong at 2.5 times. This is relatively unchanged from the first quarter and significantly improved from 2008 levels. Turning to our office exposure within the CML portfolio, it is geographically diverse and high quality. 100% of the year-to-date 2023 maturities have been paid off and we are confident in the outcome of the remaining four office loans maturing in 2023. Throughout 2023, we are actively revaluing the entire office portfolio each quarter. As of the second quarter, we have cumulatively reduced the portfolio valuation by 25% from the peak. Our current valuation is approximately 23% below the implied index value, highlighting our conservative approach relative to the broader market. The current loan to value on our office portfolio increased slightly to 57% as we further reduce valuations, while the debt service coverage ratio improved to 2.6 times. We have the experience and a long established track record of navigating real estate cycles. We are confident in the quality of our real estate portfolio and remain diligent in monitoring it and proactive in servicing it. It is high quality, well diversified and a good fit for our liability profile. We continue to be focused on maximizing our growth drivers of retirement, global asset management and benefits and protection, which will continue to deliver long term growth for the enterprise and long term shareholder value. This concludes our prepared remarks. Operator, please open the call for questions.

Suneet Kamath:

I wanted to start with RIS fee. If I think -- if my notes are right, I mean, I think this is the third quarter in a row where we've seen some large case outflows. And I get that these sometimes are low fee. But just wondering, is there something common about these outflows that we've seen over the past three quarters in terms of the type of cases or where it's going? Just some additional color on that and what the outlook is for large case flows kind of going forward?

Chris Littlefield:

I think there's a wide range. I think as we expressed in the prior quarters, one of the -- they were limited to a couple of large ones. One was a decision that we have made with respect to whether it was a good fit for our business and the other was a choice by the plan sponsor. And so when you look at the reasons for the lapses in the large case, you just see a lot of volatility in the activity and a lot of reasons for the lopses. We see M&A activity that's impacting it. We're seeing a difference in the experience following the transition onto the platform, a reluctance to make changes to make the plan more streamlined or a change in pricing. So there's a wide range of reasons why these lapses are occurring. And so we certainly have seen the increase in large case lapses, that has really been offset by continued strength on the SMB side. So I don't want to lose the fact that we see much -- great resilience there with recurring deposits up 9% and transfer deposits up 16%. And I think the other thing you're seeing in the first half of the year, you're seeing a little bit of timing activity. I think as Dan pointed out, we see really good momentum heading into the second half, again, speaking to some of that volatility of large case activity. And so I think we sit really in a good position there. And while we -- I mean when we think about the pipeline, we have a healthy pipeline, increase our activity. RFP activity, we see strong sales growth for the full year across SMB and large. But there is that volatility in large plan activity. And we do expect some additional pressure on that lapse activity in the second half. It's really difficult to give you an outlook because, as you know, the second half is a very active period of time for plan change activity. And so it's really difficult and you can have things that you think are going to transition in December and move to January. So it's really hard to predict. But again, we will see strong growth for the full year across SMB and large but we do see some additional pressure in lapses.

Dan Houston:

One thing we know for sure, Suneet, is in that wealth management, retail space, there's a lot of money that's gone to the sidelines on money market and bank deposits. And yet as we look through there and look at some of our asset management capabilities that we discussed in our earlier comments -- prepared comments, we do feel really good about the second half of the year. But with that, I'll have Pat respond accordingly.

Dan Houston:

Just one comment I want to follow up on with regards to Chris' explanation when he said M&A just for those less informed on this. In the SMB market, there's not a lot of M&A in the large case market, there does tend to be a lot of that. A lot of times, these are publicly traded companies or large private companies. And when the much larger plan comes in and acquires that smaller organization, we could be the smaller organization, oftentimes, it goes to the acquiring company and there was a fair amount of that activity and that's probably a new narrative for us as we've had more large -- as our large plan market has grown at principle.

Ryan Krueger:

I had a follow-up on real estate. Just I guess, level set, can you give us some perspective on what your real estate flows were in the first half of the year? I think they're included in the alternatives line that you provide, but I'm not sure if there's other impacts in there as well.

Pat Halter:

So Ryan, in terms of the flows in the first half of the year, they were muted relative to our historical sort of flow analysis. And I would suggest to you that that will change in the second half of the year, as I highlighted in my comments. Those flows were in the $450 million range relative to the net cash flows. If you look historically over the last five, six years, we've averaged about $3 billion a year in net cash flow. And I'm anticipating that we could be looking at something along what we typically have had as I think about the full year in 2023. And I hope that gives you a little bit of indication of our constructive view of our second half of the year.

Dan Houston:

And we have full intentions on delivering on our full year outlook, but I'll have Deanna provide some additional context on the quarter.

Operator:

Our next question comes from the line of Tom Gallagher with Evercore ISI.

Dan Houston:

Yes, I'll tell you what, I think I'll have Deanna respond accordingly on that one.

Pat Halter:

I just mentioned, Tom, that I think, as you know, we have a pipeline of opportunities in terms of investments that we're developing. And those usually are sort of the merchant build program that allows for variable investment income to be generated in the future. And my anticipation, you'll start to see more of that in 2024 than in 2023. But there is a pipeline out there and we're obviously harvesting that pipeline for the right time to sort of to optimize that. But my guess, Tom, would be more 2024 than the next two quarters.

Dan Houston:

Tom, as you very well know, this has been and continues to be a competitive marketplace. We actually differentiate ourselves in leveraging our TRS capabilities, and you see that through the nonqualified deferred compensation growth, you see that through ESOP and our ability to attract these large DB plans as well. As Chris framed earlier, it is M&A. Whether it's a good fit or not, there's still a little bit of a shake out relative to the IRT transfer block of business and whether that's a perfect alignment with our service model. But Chris is closer to it, I'll ask that he add some additional color.

Dan Houston:

We'll also say, Tom, just to maybe clean up of this a little bit, among the top three players in this industry, we all keep getting larger. Without naming names, there is a fair amount of swapping of these plans between the relative players, we win from the large players, we lose large players. And TRS is still a big differentiator out there as well as our customer service platform. So hopefully, that helps.

Erik Bass:

I was hoping you could talk a little bit about the net flow dynamics in the RIS spread business. You're seeing nice wins in PRT and growth in deposits, but flows have been a little bit muted there due to higher withdrawals. Is this just a function of having a larger blocks and needing more sales to offset the natural runoff or are there any other dynamics to think about?

Chris Littlefield:

On our spread based net cash flow, it was flat in the quarter. We certainly saw the strong PRT sales. I'd point out that those are really nice returns and so we continue to see compelling opportunities there, but that was offset by some of the GA flows due to better equity markets. Certainly, when you see better equity market performance, you see a movement out of capital preservation products, and we certainly saw that in the second quarter. The other trend I'd highlight is, as you know, we run our investment only business, our IO business opportunistically and so the maturities can be lumpy. And we certainly experienced some lumpiness in some outflows in this quarter contributing to the flat performance on spread based net cash flow.

Pat Halter:

Yes, Erik, I think the passive sort of share of the marketplace continues to increase. And that's why the investment performance numbers that we illustrated in our prepared remarks is so important, because we have to be able to demonstrate that we are producing an active return over those indices. And so we do feel with those numbers improving on the investment side, we should start to see the trajectory, our senior trajectory, frankly, in the first two weeks of July in terms of our ability to get a little more of the mind share of the law in terms of flows going into active mutual funds. It's a tough sort of marketplace in that yet to deliver really first one third sort of investment profile performance to get that wallet share. With some of our improving investment performance, we're seeing some of that increased activity, as I mentioned earlier in my prepared remarks on the net cash flow. SMA is a space that we continue to want to grow in. Mutual funds is clearly a place that we've been very active with in terms of over the years and really the place where I think we have an opportunity to grow again is in CITs. There has been a little bit of a pushback on CITs in terms of net cash flow because of the flows going into overstate of value back in the [FP] markets. We think that's sort of a temporary sort of situation. But that's sort of the landscape of what we're seeing right now relative to the retail space and the individual space, Erik. Hopefully, that helps.

John Barnidge:

Can you maybe talk about the sales volume in Specialty Benefits? I know there's the second straight quarter of declines. Is it that '22 had a bunch of pent-up demand that's creating tough comparables, or can you maybe -- are you seeing other things?

Amy Friedrich:

So John, I think you're hitting on one of the main points here, which is there definitely was pent-up demand, particularly in the smaller market kind of flowing through 2022 results. So when you look at the sort of fierce labor fight out there, sort of fierce fight for talent, there were smaller market players kind of making some purchases out there that really did represent that pent-up demand. So that was definitely good news in our 2022 results. But to put in perspective, I view our 2023, our second quarter results as really strong. They are down, as you note from 2022, but they are literally the second best second quarter sales we've ever recorded. So when I look at those sales, I see really good things for both the current quarter and looking ahead. So when I look ahead at that second half of the year, as Dan mentioned in his comments, we have introduced a new Hospital Indemnity product, it's performing well, rounding out our supplemental health offering. And when I look at the basics, the fundamentals of our business around staffing, process, technology, distributor relationships, those are really strong right now. So again, I would say it's more a comparability issue that we're seeing. I'm very comfortable with both our total premium and fee growth and the sales component of that.

Amy Friedrich:

So when I think about Hospital Indemnity, it really is not one product that's going to sit out there and kind of do the work by itself, it really is going to sit as a supplement to the core benefits that we already have in place. So what we're seeing is that it's a nice offering to fill some gaps. So when people have a hospitalization, when people have other needs that are going to be travel related or outside of something that would get covered by the medical plan, this is going to be something that helps with that supplemental hospitalization costs and pieces. So I see it as a complement. The real power in having this is that it rounds out the rest of our worksite portfolio. So we've historically seen much of our organic growth relying on that basic kind of product sets that are going to be dental and disability and life, and I love having those product sets in place. But where we haven't put our competition out there as much has been in the worksite space. So as we bundle up accident and critical illness and Hospital Indemnity, it's going to give us the ability to compete on some of those additional worksite sales that we simply haven't been as competitive in the past. So I like what that says in terms of market applicability. I like what that does in terms of how it can help us grow our total wallet share that we have across our extensive small and midsize business customers.

Operator:

Our next question comes from the line of Wes Carmichael with Wells Fargo.

Dan Houston:

Pat can clarify that for us.

Wes Carmichael:

And then on capital in the holding company, sitting at the $800 million level of liquidity. Just curious if you're kind of expecting to run that near the target there or if you expect to leave some excess there over time? And also just on the leverage ratio, it's down now when you took out $700 million of debt. Just curious if that's going to migrate back towards 25% over time or if you want to be a little bit lower towards that target?

Operator:

Our next question comes from the line of Jimmy Bhullar with JPMorgan.

Dan Houston:

I think it's two things, I'll throw out the path quick one. Number one, the investment performance helps out immensely. And then secondly, we already feel good about here in the first month of the third quarter and what we're seeing with solid flows. But Pat, please?

Jimmy Bhullar:

And then on your discussed performance fees, but if we look at asset management fees in the PGI business or just a normal management fee revenues, those are down as well. So are they down more because of just the rates and the impact of that on assets or are there other factors going on that might be more sort of sustainable in nature?

Jimmy Bhullar:

And then any comments on just competition and fee pressure in asset management, is that same as before or has there been any change in it?

Dan Houston:

Jim, as you very well know, it isn't just active like the good old days. With passive taking more of the share, you don't have value added capabilities, you're not winning. And the good news in Principal, whether it's in the high yield space, preferred space, real estate, direct lending, these are areas where we can differentiate. And it is our intentions to continue to build out those unique capabilities to compete in the marketplace. Hopefully, that helps.

Alex Scott:

First one I have for you all is just maybe a high level question on inflation and how it's affecting your expenses. I mean, certainly, there's some help up to the top line from what's been going on in the market. How do we think through inflation as a potential offset to some of the help that you're getting just in terms of top line and the economy, or the market potentially continuing to recover a bit versus the inflationary pressures that could offset some of that?

Deanna Strable:

I think Dan really talked about well that we do -- we are uniquely positioned that when inflation plays through, especially when it plays through on salary levels, we do get benefit in both RIS and benefits and protection and obviously, that plays through from a revenue perspective. We definitely have a proven track record of aligning expenses with revenue. When revenue goes down very fast or goes up very fast, there's always a natural lag. But one thing I'm really proud of is if you look at our comp and other, whether it be relative to a year ago quarter, relative to last quarter or relative on a trailing 12-month basis, they're down on all of those comparisons. Probably more -- most valid is on the trailing 12 month basis, we're seeing about a 3% to 4% decrease in adjusted comp and other. And that's despite the fact that, as you mentioned, we have had to increase salaries because of that inflationary pressure and more on talent, we've had other expenses that have been negatively impacted from inflation. And also, we have to make sure that we continue to invest in our businesses to make sure that we can continue to deliver on our promises and drive growth in the future. And so I think that's the proof of the fact that we do have that track record, and you'll continue to see that play out as we go forward.

Dan Houston:

Yes, I'll have Amy take that. Before I do that, just a reminder, when you compare Principal to other competitors in our set, we're not a pure play asset manager. So we do have operations and more customer service expense. And so on pure play asset managers when you have more variable expense because it's incentive compensation and so on and so forth, you see expense reductions perhaps a little bit easier than you do in an organization like Principal when we're providing a lot of value added services across these fee spread and risk businesses. But I think it’s always important to put that in the proper context when you're doing your comparable. So with that, Amy, Dental?

Operator:

Our next question comes from the line of Tracy Benguigui with Barclays.

Pat Halter:

So I think what's driving the sort of activity is there's places where we're starting to see the entry points in terms of where the risk return trade-off looks reasonable again. So there's a sort of an opportunity there, both in terms of core real estate but also manufacturing real estate in terms of turnaround and in the development. We also, I think, are very, I think, mindful that the debt markets have to stabilize. And with the Fed now starting to become, I think, maybe at a place where they may take a pause, I think people are having a little more confidence in terms of being able to understand where the path will be going forward in terms of valuations and debt availability and capital availability. So there is a sort of emerging market developing in terms of this [transaction activity] in general, picking up, it's still early yet, but being early sometimes is where you actually can really add value to your clients. And so there is an opportunity, as I mentioned, through the three areas that we have been very active in, which is acquiring a portfolio or taking over other managers’ assets or being able to find funding for new creative things to invest in, for instance, like data centers. So there's a lot of interesting opportunities. I know office has the headline and we're not in the office, we're not investing in new office, but we are investing in other asset classes, whether it's industrial, whether it's data centers, whether it's residential. So that's really the important thing to mention as to where we're at, what we're doing as we talk about this increased activity.

Deanna Strable:

Just a few comments there. Let me just frame kind of where we are kind of year-to-date from a drift perspective and ultimately kind of tie it back to your questions there. Both first quarter and second quarter, we actually saw positive capital impacts from drift and modest, about $5 million a quarter. And I think that really comes back to our high quality diversified portfolio. And so even though we are seeing some downgrades across the portfolio, they're more than being compensated by some upgrades. And again, that could be within the real estate portfolio on some of the asset classes that Pat mentioned or it's in other parts of our balance sheet as well. And so again, we do think there will be some drift as we go through the rest of the year. But I'd say there's a couple of things, right? I think the recession is not thought to be as deep as maybe what it was anticipated coming into the year. And then you come back to the quality and the diversification of our balance sheet and I think, again, we continue to see good results there. But I'll see if Pat has anything to add.

Operator:

Our final question this morning comes from the line of Mike Ward with Citi.

Chris Littlefield:

I think we see a very strong PRT market place right now. I think industry sales are expected to be in that $30 billion to $40 billion range for the year. Again, as we think about this business, we really focused on the returns we're getting on the capital we're investing in that business and so we remain disciplined. And so we're very comfortable. We feel very good about our performance for the first half, and we're on track for our plan for the year, and we're doing so at very nice returns. The other thing I'd say is we do benefit from having our WSRS business. A lot of the activity that we're seeing, we're able to take our existing clients' plans given that client are fully funded. I think Mercer is calling it 105% funding at the end of June. And we're able to talk to them about planned terminations and the opportunity to write PRT business with them. And then we just look at that overlap between those businesses, about 15% of our premium and about 42% of the cases in our PRT business year-to-date has come from existing clients. So we do see a robust environment there. We're picking our spots where we can maximize the return on capital and we have some built-in advantages from having an existing client base.

Mike Ward:

Maybe just on Specialty Benefits. Just wondering what you guys are sort of hearing and feeling from the employers out there, how they feel about the labor market and wages and how they're -- if their attitude is changing in terms of their approach to benefits?

Operator:

Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Houston for any final comments.

Operator:

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

Humphrey Lee:

Thank you, and good morning. Welcome to Principal Financial Group's First Quarter 2023 Conference Call. As always, material related to today's call are available on our website at investors.principal.com. In addition to our earnings call materials, we included additional details of our commercial real estate exposure in our slide presentation. As a reminder, financial results are now reported under the long-duration targeted improvements accounting guidance, or LDTI. Historical results have been recast, and are also available on our website. Following a reading of the safe harbor provision, CEO, Dan Houston; and CFO, Deanna Strable, will deliver some prepared remarks. We will then open up the call for questions. Others available for Q&A include Chris Littlefield, Retirement and Income Solutions; Pat Halter, Asset Management; and Amy Friedrich, Benefits and Protection. Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K filed by the company with the U.S. Securities and Exchange Commission. Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. Dan?

Deanna Strable:

Thanks, Dan. Good morning to everyone on the call. This morning, I will share key contributors to financial performance for the quarter, an update on our current financial and capital position and details of our investment portfolio. Reported net income attributable to Principal was a negative $140 million in the first quarter. Excluding the loss from exited businesses, net income was a positive $347 million with $11 million of credit losses. Credit drift was slightly positive in the quarter. Excluding significant variances, first quarter non-GAAP operating earnings were $395 million or $1.60 per diluted share, a strong result despite macroeconomic pressures on AUM levels during 2022. As Dan noted, first quarter results highlight the value of focus and the strength and resiliency of our diversified business strategy. As detailed on Slide 17, significant variances had a net negative impact on our first quarter non-GAAP operating earnings of approximately $33 million pretax, $29 million after tax and $0.12 per diluted share. The significant variances were primarily due to lower-than-expected variable investment income in RIS and Benefits and Protection. Mortality experience true-ups in RIS were mostly offset by LDTI model refinements in Specialty Benefits. As discussed during our 2023 outlook call, we expected variable investment income from alternative investment returns, real estate sales and prepayment fees to be lower than 2022 levels and lower than our expected long-term run rate due to macro environment heading into the year. VII was positive in total for the quarter, but we did not have any VII from prepayment fees or real estate sales. Macroeconomic volatility continued in the first quarter and pressured earnings in our fee-based businesses relative to a year ago quarter. While the S&P 500 daily average increased 4% from the fourth quarter of 2022, it was 11% lower than the first quarter of 2022 and 10% lower on a trailing 12-month basis. Foreign exchange rates were a tailwind compared to the fourth quarter but a headwind relative to the year ago quarter and on a trailing 12-month basis. Impacts to reported pretax operating earnings included a positive $7 million compared to fourth quarter of 2022, a slight negative compared to first quarter 2022 and a negative $17 million on a trailing 12-month basis. Turning to the business units. The following comments on our first quarter results exclude significant variances. As a reminder, comparisons to first quarter of 2022 are impacted by the reinsurance transactions that closed in the second quarter of 2022. Revenue growth and margins in Specialty Benefits and Principal International were in line with our expectations in the first quarter. Revenue growth in RIS and PGI were pressured by the impacts of macroeconomic volatility and lower account values and AUM compared to a year ago but both businesses are benefiting from more favorable conditions relative to the assumptions in our 2023 outlook. Despite the pressures on revenue growth, the margin in RIS was strong in the first quarter and benefited from diligent expense management, onetime items in the quarter and timing of expenses. For the full year, we continue to expect to be within the 35% to 39% guided range with the ultimate level impacted by macro conditions for the remainder of the year. PGI's margin and pretax operating earnings were pressured by expected expense seasonality as well as expected lower transaction and borrower fees. Expenses in the first quarter were elevated by approximately $20 million due to seasonality of payroll taxes and deferred compensation. We continue to expect PGI's margin to be within the 34% to 37% guided range for the full year. Principal International had strong earnings in the first quarter driven by growth across the business and higher AUM. Favorable impacts of inflation and higher interest rates in Brazil were offset by lower-than-expected encaje performance and VII in Chile. In life, pretax operating earnings and margin were lower than expected, primarily due to higher claims experience in the quarter. The decline in premium and fees was driven by the 2022 reinsurance transaction and will normalize throughout the year. We continue to expect to deliver on our 2023 guidance for the full year, both at the business unit level as well as for the total company. Turning to capital and liquidity. We remain in a strong financial position despite the volatile environment. We ended the first quarter with $1.8 billion of excess and available capital including more than $1.5 billion at the holding company. This includes our $800 million target and $700 million of proceeds from debt issuance in the first quarter that is earmarked for debt maturity and redemption in the second quarter, $300 million in our subsidiaries and $30 million in excess of our targeted 400% risk-based capital ratio. During the quarter, in addition to returning excess capital to shareholders, we accelerated our organic capital deployment as we saw attractive return opportunities in our businesses. This was a pull forward of our business plan for 2023. Looking ahead, our free capital flow generation will increase throughout the year. We returned $306 million to shareholders in the first quarter, including $150 million of share repurchases and $156 million of common stock dividends. Last night, we announced a $0.64 common stock dividend payable in the second quarter, in line with our targeted 40% dividend payout ratio. We remain focused on maintaining our capital and liquidity targets at both the life company and the holding company, and we'll continue pursuing a balanced and disciplined approach to capital deployment. I want to end my comments by providing some additional details of our investment portfolio, including our real estate exposure. As Dan mentioned, we have intentionally improved the overall credit quality across our fixed maturity and real estate portfolios since the global financial crisis. Our investments are high quality, well aligned with our liability profile, and we are well positioned for a variety of economic conditions. Starting on Slide 11. Specific to the real estate portfolio. As of the end of the first quarter, our commercial loan portfolio has a current average loan-to-value of 46% and a debt service coverage of 2.5x. This has improved from 62% and 1.8x in 2008. We have minimal exposure to floating rate loans and a very manageable maturity schedule of high-quality loans with only 4% maturing in 2023 and another 7% in 2024. Our commercial office portfolio is geographically diverse and high quality. We saw signs of stress building in this sector and proactively reduced our office exposure from 37% of our mortgage portfolio in 2016 down to 25% today. We have taken a conservative approach with our office portfolio and have manageable near-term maturities. We have already reduced valuations in our office portfolio by 22% from the peak, and they are 20% below the current implied index value. The current loan-to-value on our office portfolio is 52% and debt service coverage is 2.5x. We have looked at a number of different stress scenarios on office valuation. This includes an additional 20% to 40% decrease from our current conservative valuations and assumes an immediate default of all office loans over 100% LTV. The ultimate impact to our RBC ratio is estimated to be 2 to 3 percentage points under the 20% additional decrease scenario and 10 to 12 percentage points under the 40% additional decreased scenario, both very manageable. That said, we have the experience and a long-established track record of navigating real estate cycles. It will take time for any market cycle to emerge, and the impacts would play out over a number of years. Looking at our CMBS portfolio, relative to 2008, we have decreased the overall size of our portfolio by 22% and improve the quality to 98% with an NAIC 1 rating today. Our equity real estate portfolio is well diversified with a high concentration of property types with strong fundamentals, such as industrials and life sciences. The market value of our portfolio is substantially higher than our carrying value. Overall, we are confident in the quality of our real estate portfolio, remain diligent in monitoring and proactive in servicing it. We have built a high-quality portfolio that is well diversified and a good fit for our liability profile. 2023 will not be without its challenges, but we are positioned to focus on maximizing our growth drivers of retirement, global asset management and Benefits and Protection which will drive long-term growth for the enterprise and long-term shareholder value. We have the financial flexibility, discipline and a track record of managing through times of macro volatility and uncertainty. This concludes our prepared remarks. Operator, please open the call for questions.

Ryan Krueger:

First question was just on the office stress scenario that you provided. Just curious in -- I mean that was a pretty severe scenario and a pretty limited RBC impact. Was that just based on the impact of downward ratings migration and some level of credit losses? Or did you assume anything for the impact if you'd have to take over some of the properties and they get the higher capital charge from being an owned real estate property?

Deanna Strable:

Yes. It was us taking over those properties in a complete default. Obviously, the extreme one was very unlikely 40% additional decrease from our already reduced 22% values. And then I also think it's important that, that wouldn't all happen at one time and would happen over an extended period of time.

Daniel Houston:

That's a great question. Really appreciate that, Ryan. Pat, can you help us out on that one?

Daniel Houston:

Hopefully, that helps, Ryan?

Operator:

Our next question comes from the line of Jimmy Bhullar with JPMorgan.

Daniel Houston:

Chris, please.

Daniel Houston:

Yes, 1 large plan like that can mask a really strong quarter. Do you have a follow-up, Jimmy?

Daniel Houston:

Pat, please.

Operator:

Our next question comes from the line of John Barnidge with Piper Sandler.

Daniel Houston:

Yes, it's a great question. The one thing that's amazing is just how competitive that SMB marketplace still is in terms of attracting and retaining talent. Those things still remain strong. But Chris, you want to provide some additional detail on the strength of the matching contributions.

John Barnidge:

And my follow-up question, maybe just to clarify, on the $1.8 billion on Slide 3 of the presentation, there is a footnote you talked about in your prepared remarks about the $700 million in proceeds. Are we supposed to normalize for that? Or is the $1.8 billion the number we should be using?

Deanna Strable:

Yes. Thanks, John, for the question. I hope your recovery is going well after your accident. Just a couple of things there. That $1.8 billion that you see on the slide is elevated due to the $700 million of debt issuance that we issued in the first quarter but we will pay off the corresponding existing debt in the second quarter. So a pro forma would be more like the $1.1 billion. Your follow-up is then why did that go down from where we were at the end of the year. And so just a couple of comments on that. Really, the 2 things that are going to impact that roll forward other than that issuance of debt I just referred to is, one, the return of capital to our shareholders, and two, any free cash flow and dividends between entities during the quarter. So obviously, you saw during the first quarter, we continued to return a sizable amount to our shareholders, over $300 million with $150 million of share buybacks and a slightly larger amount through our common stock dividend. On free cash flow and dividends, first quarter is always seasonably light. It's really kind of 2 primary drivers there. We build up, and then there's just seasonality in the timing of dividends. And then also in the first quarter, you have all the cash payments of bonuses that also pressures first quarter as well. If you go back to '22 and look at the roll forward from fourth quarter of '21 to first quarter of '22, you're going to see a very similar pattern which pointed to minimal free cash flow in the first quarter, but albeit a very strong free cash flow for the full year. Beyond that, fourth quarter is always our largest quarter for free cash flow. As you heard me mention in our prepared remarks, one thing that was a little different this quarter versus first quarter of last year, is we did see a higher volume of high-return organic deployment opportunities in the quarter and accelerated a portion of our full year sales plan -- we're not changing our full year sales expectation. So again, it's just a shifting from future quarters into the current quarter and we actually then will see higher than originally anticipated free cash flow in the other quarters. The one I would point to that is most obvious is PRT. We had nearly $600 million of sales in the quarter, and first quarter is typically a very, very light quarter. So I think bottom line, the seasonality we saw was not unexpected. We've seen it in prior years. We'll continue to see it in future years, and we remain confident about our free cash flow opportunities for the entire year. Thanks.

Tracy Dolin-Benguigui:

I would like to touch upon specialty group benefits. Can you add color regarding what drove higher loss ratios across several products like dental and vision, group life, the individual disability.

Amy Friedrich:

Yes, sure. So I think I would settle in on saying we were generally feeling good about the loss ratios you're seeing. They're within the ranges that we would have expected. And dental is probably the one that I would highlight there. It does have a bit of seasonality in it. As you know, and as we've discussed on a lot of private call -- previous calls, the dental loss ratios really got out of track in terms of seasonality with COVID. So with some of the closures and other things that happened, we sort of lost our ability to see that seasonality in the industry for a couple of years. What I see in dental seasonality is it's returning back to pre-COVID levels. So when I look at how dental utilization emerges over the year, it's typically the highest in first quarter. So what I would say is that loss ratio that we're seeing for dental is seasonal. It's back to expected patterns, and it's still within what we would expect to see. Our full year range is for some of the loss ratios that we're seeing across our group benefits, and IDI block are within normal levels.

Tracy Dolin-Benguigui:

Excellent. Just circling back on the comments about adjusting your available and excess cash. So if I take out the $700 million from your $1.5 billion of OCO cash, you're exactly at the $800 million minimum threshold. And then when I'm thinking about it, there isn't a lot of excess capital from your subsidiaries, $300 million or so. You do sound confident about meeting your 75% to 85% free cash flow conversion. Are you expecting greater organic surplus generation through earnings and that's how you'll get there for the remainder of the year?

Daniel Houston:

Hopefully that helps, Tracy.

Wesley Carmichael:

I kind of wanted to stick with free cash flow for a second, too, but on Slide 2 of the deck, it mentions that you expect free cash flow conversion to increase throughout the year. But my understanding is that ratio is on the net income, excluding the exited business. So if I looked at the first quarter, the $300 million returned to shareholders, I calculated a ratio of 86%. So it seems like you're kind of there already in the first quarter. So I'm just trying to reconcile that with your thoughts on that should accelerate.

Deanna Strable:

Wes, just so you're aware, the deployment can come out of 2 places. It can come from excess you had coming into the quarter as well as the free cash flow generation during the quarter. And we came in at about -- I think it was just shy of $300 million of excess coming into the year in our holdco and in the entities. And so again, you need to factor that into that result as well.

Daniel Houston:

True to that. Chris, do you want to go ahead and respond?

Daniel Houston:

It's also probably worth calling out Wes is that about 25% of those PRT sales actually came from existing full-service customers. And again, that comprehensive approach to retirement solutions is what we're about. And you can see where those intersections come together and help drive results for the organization.

Operator:

Our next question comes from the line of Michael Ward with Citi.

Daniel Houston:

Appreciate that, Michael. And Pat also might be able just to maybe share a little bit with the group about the resources we have surrounding this in terms of valuations and feet on the streets to assess this asset class.

Daniel Houston:

Did that help, Michael?

Daniel Houston:

Pat, please.

Deanna Strable:

Mike, that was not included in the stress test that we included. But if you actually look at Page 14 and given that 98.5% of those CMBSs are NAIC 1, I think any impact in a stress scenario, and again, in addition to the commentary that, Pat, would be very, very minor relative to that risk.

Suneet Kamath:

I appreciate all the color on how you go about valuing the office CRE, it does sound like you have a lot of resources. But just curious, is there part of the process where you go through getting a sort of a third party to kind of validate the analysis, just to kind of give you one more check.

Patrick Halter:

Yes. So typically, you'd get an appraisal. The challenge today, as you can imagine, Suneet, is the appraisals are probably not as current, not as, I think, active in understanding real time what's going on within the reconstruction of those cash flows, the buildings and how the tenancy and the market rents relative to the contract rent buildings are evaluated and changing. So we do not sort of -- in that sort of analysis go out and get a third-party valuation opinion. We think that our expertise, our deep analysis is probably superior frankly, to that.

Patrick Halter:

Just to add to that, we have over 550 institutional investors in over 34 countries, and they also feel very comfortable with the process we deploy here.

Deanna Strable:

Yes. I think there will be volatility quarter-to-quarter. But I think if you annualize that amount, that's in the ballpark. And I think if you kind of looked at kind of our free cash flow estimates relative to kind of what you'd be expecting, you'd get to that same level. Obviously, we want to recognize the current environment. We need -- there is some lumpiness quarter-to-quarter, we need to take into account. But yes, I think that's a good indication of what could occur through the rest of the year.

Erik Bass:

In the RIS business, net investment income increased pretty materially from the fourth quarter, even adjusting for variable investment income. So I was just hoping you could talk about what's driving this, and the outlook going forward? And then how we should think about how much of that benefit drops to the bottom line?

Christopher Littlefield:

Yes. Sure. Thanks for the question, Erik. I mean, I think -- we definitely are seeing 3 primary drivers in what's happening in that investment income. Certainly, we've seen the benefit to the increase in short-term interest rates, and that certainly had a positive effect. We've seen some additional timing difference between when the rates are increasing and when that rates are credited back to the customer, so the lag. That's been a second driver. And then we've seen overall growth in the block of our business. So those are the key drivers in NII. I think when you look at the supplement, you look just at NII, it can -- it's not necessarily the best picture because you also have to take into account the interest that's being credited in the BCSD line. And so there is certainly a benefit that we're seeing, but it's not as large as you would see just by looking solely at the NII line. So definitely a benefit. We expect to see some additional benefits if interest rates continue to rise, although I think we're kind of nearing the end of the larger increases that we saw over the course of 2022, and we expect to have some benefit. What we've also said through '22, and what I'll reiterate again today, that will normalize over time in net interest margin. There are competitive pressures and others, and that will tend to normalize over the long term, but we will -- we expect to see some benefit.

Erik Bass:

Yes, a follow-up for Pat. Just curious what you're seeing in terms of client demand for fixed income. Has interest started to pick up now that rates have stabilized a bit? And if so, are you seeing new money going into traditional active products? Or is more being allocated to passive?

Operator:

Our next question comes from the line of Tom Gallagher with Evercore.

Deanna Strable:

Yes. Thanks, Tom, for the question. I think the seasonality is greater than what you're giving credit to. If you went back to the roll forward from fourth quarter to first quarter last year, there we deployed approximately $900 million in the quarter, and our capital was reduced by just shy of $900 million. And so again, very modest free cash flow. So you're understating the amount of seasonality. I think maybe the organic opportunities is probably in the ballpark. But really that seasonality is much greater than what you were anticipating in your roll forward. There were some modest one-timers in the quarter. I'd say either they were anticipated in our capital plan, but we knew they would be pressuring first quarter or they will reverse in future quarters, but it's really that seasonality that you're understating, and I take you back to a year ago to kind of do a comparison.

Daniel Houston:

Yes. Let me have Deanna go ahead and respond to that. I gave her responsibility over cap marks.

Patrick Halter:

No, I think that's really well said. Just to add a little bit, Tom, to the dimensionality of it. It is -- does have a big concentration in industrial and has a big concentration in residential. So that's really good. I think we've identified in the office in the past what carrying value is a little over -- a little over $1.5 billion versus the cost base $500 million. So -- but it's a very diversified portfolio. I think we have a lot of flexibility to use the portfolio as Deanna highlighted, and it's well positioned for that.

Alexander Scott:

The first one I had is on the RIS expense timing, compensation and other came down a pretty good amount year-over-year. And I know you called out expense timing. So I just wanted to see if you could unpack that a little bit for us. I mean I'm cognizant of the fact that you guys have been very good at managing expenses over time. So I want to understand how much of it is like more pure expense timing versus good old-fashioned expense management, the way you guys have been doing in the last couple of quarters?

Christopher Littlefield:

Yes. Thanks for that, Alex. I mean what I would say is we continue to exercise good disciplined expense management. And I think as I said last quarter, we're committed to maintaining our margins. And so we're going to take the actions that we need to align revenue and expenses. We definitely did see some onetime benefits from some prior period accruals that were no longer needed. We had some timing, which we think will catch up in the quarter over the course of the year. We're delivering on the expenditure synergies from IRT, and we're investing for growth. So when I put all of that together, we -- by the end of the -- through 2023, we expect comp and other to essentially be flat year-over-year. We'll get some good savings, but we're also investing in for future growth as well. So hopefully, that answers the question. The only other thing I'd point out that we haven't highlighted is when we're taking these disciplined expense management, we had about $3 million of severance expense in the first quarter that we didn't call out especially. We had about 7% in the fourth quarter last year, and we had 11 for full year last year. So we're still showing good expense management despite some of those additional severance costs.

Alexander Scott:

Yes. Understood. And then maybe just high level on PGI. Could you talk us through the outlook for flows and any nuances in your portfolio that kind of push it one way or the other? Or should we just think about some of the overall industry pressures? And any color you could provide to help us out there?

Patrick Halter:

Yes. So thanks for the question, Alex. Clearly, I think on the retail side, the platform side, there still continues to be a lot of investor uncertainty relative to market conditions, the economy, inflation, the path of interest rates. And as I mentioned in my response to Erik, there is a lot of money that continues to flow into money market accounts, CDs. And that is, I think, something that will continue to probably be an active area for investors. That being said, I think, as I mentioned earlier, we do like our relative position to specialized investment income products, as I mentioned in my previous response. And I think we will continue to see, as I highlighted, also more active interest in private credit, private debt. Some of the real estate sort of offerings that we believe are viable in this marketplace as we look forward to next year or 2. And so I think that's an area of potential growth on the institutional side. The equity space, we have some strong equity sort of capabilities. We had a couple of nice wins. I think we highlighted that in the material in the first quarter. So I think there's still uncertainty, there's still a lot of sort of thought capital we need to provide investors were to position themselves in an uncertain marketplace. But our broad-based of investment capabilities, I think, offer a lot of choice to them.

Joshua Shanker:

Just an easy one. I want to follow up on [indiscernible] Tom was asking. In the prepared remarks, you talked about the pull forward on your business plan. What's the normal seasonality of deploying capital into the business plan. Is it usually equal in every quarter? And how big is the variance?

Deanna Strable:

Yes. I don't think that's an easy answer because every product is different. Again, the one we highlighted was PRT because that was different than what was kind of a normal seasonality where PRT tends to be in a normal year, very back-end loaded, and we saw, again, great opportunity, great returns and wanted to take advantage of that. And so again, seasonality, as I said, first quarter free cash flow, very pressured. Fourth quarter free cash flow, very strong. But again, product-by-product, that seasonality is very, very different.

Daniel Houston:

Yes. I appreciate that, Christine. A couple of quick comments. The first of which we appreciate your insights and your questions. Secondly, a large portion of the management team that's here today was here during that '08, '09 period. We've been through this cycle before, and we'll find an appropriate path through this cycle. Maybe third, just recognizing that we're trying to be very proactive with investors on the disclosures, in particular, around commercial real estate and office because we think it's the right thing to do to provide that level of transparency. Also, I think it's helpful to understand the clarity and the emergence of our free cash flow, again, reaffirming where we had set out from the beginning of the year. Again, the first quarter has had this historically. And then also to recognize the fundamentals of the markets in which we serve. And by the way, the international markets as well, which we didn't get into a lot of conversation today, has really held up well. So seeing very positive cash flows in both Asia and Latin America. So in spite of some very challenging and what I'd call volatile macroeconomic environment, the markets from which we serve have held up very well, and it's certainly our intention to deliver on the promises we made during our outlook call. So thank you, and look forward to seeing you on the road. Have a great day.

Humphrey Lee:

Thank you, and good morning. Welcome to Principal Financial Group's fourth quarter and full year 2022 conference call. As always, materials related to today's call are available on our website at investors.principal.com. Following a reading of the safe harbor provision, CEO, Dan Houston; and CFO, Deanna Strable, will deliver some prepared remarks. Dan will open the call for questions. Others available for Q&A include Chris Littlefield, Retirement and Income Solutions; Pat Halter, Global Asset Management; and Amy Friedrich, U.S. Insurance Solutions. Some of the comments made during this conference call may contain forward-looking statements within the meaning of Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K filed by the company with the U.S. Securities and Exchange Commission. Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures. Reconciliation of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. Our 2023 outlook call is scheduled for Thursday, March 2, where we will share enterprise and business unit 2023 and longer term guidance. On Wednesday, March 1, we plan to release a recast fourth quarter 2022 financial supplement. It will include the impacts of the targeted improvements for long-duration insurance contract accounting guidance, or LDTI, which goes into effect with our first quarter 2023 reporting. Dan?

Deanna Strable:

Thanks, Dan. Good morning to everyone on the call. This morning I’ll share the key contributors to our financial performance for the quarter and full year, our current financial and capital position, as well as an update on LDTI. Full year reported net income attributable to principal was $4.8 billion, excluding income from exited businesses net income was $1.5 billion for the full year with manageable credit losses of $48 million. Fourth quarter non-GAAP net income, excluding exited businesses was $504 million with $12 million of credit losses. As a reminder, the income from exited business is non-economic and is driven by the change in the fair value of the funds withheld embedded derivative. Importantly, it doesn’t impact our capital or free cash flow and can be extremely volatile quarter-to-quarter. We also had positive credit drift during the year further demonstrating the quality of our balance sheet. We reported full year non-GAAP operating earnings of $1.7 billion or $6.66 per diluted share including $422 million or $1.70 per diluted share in the fourth quarter. Excluding significant variances full year non-GAAP operating earnings was $1.7 billion or $6.77 per diluted share, this included $420 million in the fourth quarter or $1.69 per diluted share. Compared to full year 2021, we increased earnings per share 2% as the benefit from share repurchases and strong customer growth was partially offset by macroeconomic pressures on earnings. As detailed on Slide 15, we had several significant variances that virtually offset and had a slight net positive impact on non-GAAP operating earnings during the fourth quarter. On a pre-tax basis, benefits from lower DAC amortization higher than expected Latin American Encaje performance and favorable Brazilian inflation more than offset lower than expected variable investment income. These had a net positive impact to reported non-GAAP operating earnings of approximately $5 million pre-tax, $2 million after tax, and $0.01 per diluted share. While variable investment income was positive for the quarter, we experienced lower than expected alternative investment returns, prepayment fees and real estate sales. Macroeconomic volatility continued in the fourth quarter and pressured earnings in our fee-based businesses. The S&P 500 daily average decreased 3% from the third quarter of 2022, 16% from the fourth quarter of 2021 and 4% on a full year basis. Relative to our 2022 outlook, the full year 2022 S&P 500 daily average was 17% lower than we expected heading into the year and fixed income returns were approximately 18% lower. This unfavorable market performance negatively impacted AUM, account values, fee revenue margins and earnings in RIS-Fee and PGI throughout the year. Headwinds from foreign exchange rates pressured reported pre-tax operating earnings by a negative $5 million compared to the fourth quarter of 2021 and a negative $21 million for the full year. It was immaterial compared to the third quarter of 2022. Throughout 2022, we took actions across the enterprise to manage expenses as fee revenue was pressured as we have during previous periods of unfavorable macroeconomics. Our efforts have paid off, on a full year basis, compensation and other expenses excluding significant variances were 3% lower than 2021 and fourth quarter expenses were 8% lower than the fourth quarter of 2021, despite approximately $15 million of elevated severance and restructuring expenses across the fee-based businesses in the quarter. Some expenses naturally adjusted throughout the year like incentive compensation and other variable cost, and we took actions to reduce other expenses while continuing to balance investments for growth. As a result, we didn’t see the typical 7% to 10% increase in compensation and other expenses this fourth quarter relative to the average of the first three quarters. Turning to the business units, the following comments on fourth quarter and full year results exclude significant variances. RIS-Fee’s margin improved in the fourth quarter, but end of the year below guidance as the benefit from IRT expense synergies was more than offset by unfavorable market performance, which pressured fees and net revenues throughout the year. Through the end of 2022, we’ve realized more than $80 million of run rate expense synergies and are well on track to realize the full $90 million in 2023. RIS-Spread net revenue growth and pre-tax margin exceeded our post-transaction guidance for the full year. Favorable investment income, a benefit from rising short-term interest rates and growth in the business helped offset the impacts of the reinsurance transaction. We completed $1.9 billion of pension risk transfer sales in 2022, including more than $750 million in the fourth quarter. The PRT pipeline remains very strong as we head into the first quarter. PGI’s pre-tax margin was 39% for the full year and at the low end of our guidance range despite significant macro headwinds throughout the year. The overall management fee rate of approximately 29 basis points remain stable. And Principal International pre-tax operating earnings were pressured throughout 2022 as underlying growth in the business was masked by the regulatory fee reduction in Mexico and foreign exchange headwinds. On a constant currency basis, full year pre-tax operating earnings increased 5% over 2021 with strong growth in Brazil and Chile. In Specialty Benefits, pre-tax operating earnings and premium fees both increased the strong 11% over full year 2021. This was fueled by record sales as well as strong retention and employment growth while maintaining disciplined expense management and a stable loss ratio. Turning to capital and liquidity, despite the volatile environment, we remain in a strong financial position heading into 2023. We ended 2022 with $1.5 billion of excess and available capital. This is above our targeted levels as we felt it was prudent to be disciplined due to the uncertain and volatile macro environment. This included approximately $1 billion at the holding company, $200 million above our $800 million target, $425 million in our subsidiaries, and $80 million in excess of our targeted 400% risk-based capital ratio estimated to be 406% at the end of the year. Our leverage ratio is low at 22% and within our 20% to 25% targeted range. We have the financial flexibility, discipline, and experience necessary to manage through this time of macro volatility and uncertainty. As shown on Slide 4, we returned $2.3 billion to shareholders in 2022, including nearly $1.7 billion of share repurchases and more than $640 million of common stock dividends. We also deployed $300 million to debt reduction and approximately $200 million towards M&A bringing our full year capital deployments to $2.8 billion. In the fourth quarter, we returned more than $400 million to shareholders with $250 million of share repurchases and $156 million of common stock dividends. Last night, we announced a $0.64 common stock dividend payable in the first quarter in line with our targeted 40% dividend payout ratio. We remain focused on maintaining our capital and liquidity targets at both a life company and the holding company and will continue with a balanced and disciplined approach to capital deployment as we head into 2023. Our investment portfolio is high quality and a good fit for our liability profile. The commercial mortgage loan portfolio is very high quality with an average loan to value of 46% and an average debt service coverage ratio of 2.5 times. We have a diverse and manageable exposure to other alternatives and high risk sectors, and importantly, our liabilities are long-term and we have disciplined asset liability management. Additional details of our investment portfolio are available in the appendix of the slides. As a reminder, LDTI goes into effect in the first quarter. Importantly, this doesn’t change our underlying economics, free cash flow generation or our capital position, but it will have an impact on our reported financial results. We plan to release a recast fourth quarter supplement on March 1, the night before our 2023 outlook call. The most notable impact to total company non-GAAP operating earnings is a change to the geography of some variable annuity fees, moving the hedging related fees below the line. This will reduce our operating earnings by approximately $60 million on an annual basis with no corresponding impact to net income, free cash flow generation or our capital position. In addition, there will be impacts to segment earnings that will largely offset at a consolidated level. More details will be shared during our upcoming outlook call. Moving to equity, the transition impact from the adoption of LDTI will decrease total stockholders’ equity by approximately $5.3 billion as of January 1, 2021 with nearly all of the impact in AOCI. Sitting here today, we expect the impact of stockholders’ equity from LDTI to be slightly positive as of the fourth quarter of 2022, as interest rates have risen significantly from where they were at the beginning of 2021. 2022 was a transformative year for Principal as we completed the reinsurance transactions mid-year, executed on our go-forward strategy and strengthened our capital management and deployment approach. We’re focused on maximizing our growth drivers of retirement, global asset management and benefits and protection, which will drive long-term growth for the enterprise and long-term shareholder value. This concludes our prepared remarks. Operator, please open the call for questions.

John Barnidge:

Thank you very much, and good morning. Other asset managers have announced employee count reductions given lower assets. No. Principal always has expense discipline approach with expenses down enterprise wide and there was a comment about severance in the Fee business. Can you maybe talk about how you’re viewing staffing levels in PGI and maybe more color on that severance in the Fee business, please?

Pat Halter:

Yes, John. Thanks for the question. So maybe just to kind of set the stage, as Dan mentioned, we’re very focused on operating margins and as you saw in the fourth quarter operating margin tipped a little bit below 37%, 36.8%, which is down from the third quarter of 38.4%. And that was clearly pressured as you highlight in terms of the volatility, investor risk aversion and resulting in lower average AUM in terms of fee generation. And we focus on that, absolutely in a very sort of a purposeful way as we think about managing our organization. We think our management team continues to be very, very disciplined in terms of, as you suggest, expense management, and it’s really aligning those revenues and those expenses. And clearly the fourth quarter required us to align the revenue with expenses, given the challenging and marketplace. We’re going to continue to be, I think, very focused on looking at activities that frankly are not producing growth and revenue contribution for the organization. That’s our main focus in terms of our expense management proposition. I want to make sure we clearly are staying focused on client interest and serving our clients very, very well. So our teams continue to be focused on that, that is very important. But also it’s very important, John, to highlight that we’re continuing to make sure that we are absolutely investing and challenging our teams to invest where we can maintain long-term growth and long-term, I think, revenue for the organization. So we’re going to continue to be very focused on expense management, but we’re going to be very focused also on investing in talent where we need talent and in terms of capabilities so that we continue to be relevant as investor interest shift and as capabilities shift in terms of their desires. We’re going to continue to invest in our distribution which we have, which is very important to our growth and we’re going to continue to further develop our private investment capabilities. That’s very important to our growth going forward also. So I really want to make sure that we highlight the growth centric – centricity about we’re going to continue to do and our management team is focused on that. In terms of expenses, we had some severance expenses in the fourth quarter, around $5 million of the severance expenses. For the year, our expenses were up around 2% year-over-year. And that’s obviously something that we are very conscientious of to make sure that those expenses stay in a very reasonable level in terms of our ability to continue to invest for growth, but continue to be very focused on margins.

John Barnidge:

It is very helpful. Thank you. And my follow-up question, exciting news in early January about the pension joint venture. Can you talk about maybe how that’s going to impact your business prospects in China? Thank you.

John Barnidge:

Thanks for the answers.

Jimmy Bhullar:

Hey, good morning. So first just had a question on flows in the asset management business. If you can talk about to what extent are they being affected by the overall environment that the asset managers are facing versus maybe your performance getting a little worse over the past year? And then I had a question similarly on your outlook for flows in the retirement business obviously this quarter feed retirement flows were pressured because of the lapse of a large case, but what’s the – what’s your outlook in terms of deferral rates, matching contributions and just flows in that business in the current environment?

Pat Halter:

Yes. Jimmy, maybe just to start off with sort of the fourth quarter. Fourth quarter always is challenging, typically, that’s a very challenging seasonal quarter. But it was even more challenging because of the investor sentiment that we experienced in the fourth quarter. It was a sentiment of basically being risk off and positioning their portfolios with a waiting of concern. Concern about the fed, concern about the path of inflation, nervousness around the economic growth and related company earnings. So this risk off sort of impact was amplified, particularly in the mutual fund investor base in addition to being sort of focused on accelerating their holdings for tax management reasons, which offset some of the capital gains in this period. So we definitely saw lower sales, but also elevated withdrawals in our retail mutual fund business. And we’re not unique in the industry as a result of that. We definitely have seen outflows in fourth quarter. They were in equities predominantly, but also in fixed income. We also experienced in the fourth quarter, Jimmy, I think, a slowdown in real estate for the first time in terms of new investment activity. But I rest assured we have a very deep strong pipeline of committed capital in real estate. But given market conditions, we did not deploy as much of that new capital into the markets in the fourth quarter. Just for framing, for net cash flow for the full year, we continue to see a very strong net cash flow picture. And I think that’s a better view of a net cash flow in terms of trends, we are very pleased to see that managed net cash flow for the year, about $3.9 billion, Jimmy. And this is up about $1 billion from 2021, which net cash flow of around $2.9 billion. So we continue to see, I think, some strong longer term, I think expectations toward our ability to generate net cash flow. Dan, as we highlights beginning of the year, we definitely are seeing a change in sentiment. Investor behavior is becoming, I think, a more sort of positive in terms of tone, both in the equity particular in the fixed income markets. And I think one area that I think we’re going to be, I think, quite well prepared and well, I think, equipped in terms of the [indiscernible] is in terms of fixed income investments in the flows towards that. We have a great lineup of fixed income investments, where it’s preferred high yield emerging market debt, and all those fixed income investments are in the first quartile in terms of Morningstar performance on one, three and five-year basis. And I think we’ll continue to see flows in the real estate debt and the private credit space where we still have, I think, some very strong performance. So I think as we kind of look forward in terms of 2023 I think we’re well positioned in terms of our ability with the investment performance that we have to continue to attract capital. We’ll probably see our real estate flows be a little bit more second half orientated, because I think we need to have some of the, like, [indiscernible] evaluations. But I’ll just suggest to you Jimmy that performance is absolutely on our focus list. But it really requires us to be more deeper when we talk about investment performance to look at the type of investments we are absolutely seeing money in motion toward. And the trend relative to that is definitely in our direction in terms of our capabilities. So very constructive, I think we have a strong off-season lineup in terms of investment capabilities and look forward to capturing the shifts in the investor sentiment, which is quite positive at this point.

Chris Littlefield:

Yes, great. Yes. Thanks for the question, Jimmy. So I think as Dan mentioned, as we've indicated in the past, the fourth quarter is a high outflow quarter for us as plans change a lot. And similarly we see the opposite effect in the first quarter as sales come on. The other thing I'd noticed that when we have institutional large plans flows, those can be volatile and lumpy in a quarter, both on the deposit side and withdrawal side. And we certainly saw that in the fourth quarter with that single low fee large plan, which was about $3 billion in assets, none of which were managed by Principal. So we definitely saw that volatility. I mean, I think as we've talked about it, net cash flow is one lens, but we also look at the underlying fundamentals of the business and how we're doing in earning Principal investment management mandates. And if we look at how we're focused on profitability and driving increased revenues, we have very good trends in earning Principal managed assets throughout 2022 across all segments. We saw significant fewer investment changes out of Principal managed investments in the fourth quarter, and we're seeing significance to assess winning mandates from existing customers who came over from IRT, all of which are very healthy. If we look at our historic strength in SMB for the full year, just looking at SMB flows, net cash flow was over $2 billion for 2022. So also health in that core part of our market. If we look at the fundamentals, I think Dan mentioned recurring deposits where we see healthy recurring deposit trends. The number of participants deferring are up, the number of participants receiving a match are up. The average match dollars are up and the number of participants with account value are all up. So healthy trends there and specifically with respect to the first quarter, again, we do see seasonality. It tends to be a higher inflow quarter for us. We think that trend will continue. We expect to see positive net cash flow due to higher sales and healthy recurring deposit trends in the first quarter. So feel overall good about the overall business.

Jimmy Bhullar:

It was very helpful. Thank you.

Suneet Kamath:

Thanks. First question, just on capital as we think about 2023. I think Deanna in your comments you talked about having some prudence in terms of managing capital. But can you give us a sense of just capital return for next year, what your thoughts are and maybe couch it as a percentage of earnings? I know it's all going to change under LDTI, but maybe under the current accounting construct if you could just help us with that.

Deanna Strable:

Yes. Suneet, what I'd say is we plan to give more color on our 2023 capital deployment at Outlook, but I think you can go back to kind of what we've talked about. We continue to feel that 75% to 85% of net income is a really good free cash flow percentage given our portfolio of businesses and how we think about very high bars relative to organic deployment of capital. We are rolling over a slightly higher excess capital as we go into 2023 and we'll assess whether to deploy that as we go throughout the year as we get more clarity on the economic environment. So that's how I would think about it. But again, we look forward to discussing that more in early March.

Suneet Kamath:

Got it. Yes, I did have – just one that just jumped out at me a little bit was the LDTI disclosure. The $60 million impact is not big for the overall company, but I think it's a decent percentage of RISV or certainly larger than I thought. So maybe if you could just – can you just tell us like how much of RISV earnings come from variable annuities?

Deanna Strable:

Yes. That isn't something that we disclose. What I would say is, as you're aware, we have about $9 billion enforce block of VA business. That business has consistently performed very well and contributed to our overall retirement franchise. We've always managed that on a net income basis because we knew there was some differences between the geographies of the fees and where the hedging gains and losses do. As we went through the LDTI process, which we've been working on for many, many years we got a better information that allowed us to split the fees between hedging and non-hedging fees. And even though there's not a consistent treatment of this across the peers, we think this is a better alignment of those fees as well as where those hedging gains and losses go. So again, we like our VA business, it's a key part of our retirement franchise. It's performed well given how we've managed that in a very disciplined approach. And ultimately we continue to think that'll be a part of a contributor to our retirement franchise going forward. You didn't ask it, but I did want to just mention the other impacts of LDTI. Even though the $60 million is what we think is the enterprise impact, we actually do see some other impacts to operating earnings with items such DAC. The reason that we didn't include those is they virtually offset at a enterprise level – very immaterial at an enterprise level. We do expect to see some positive impacts in RIS offset by some negative impacts in individual life. But we plan to give you much more clarity on that when we recast our fourth quarter supplement the night before our Outlook Call in early March.

Suneet Kamath:

Thank you.

Tracy Benguigui:

Thank you. I also have some capital questions. So 4Q buybacks, it came in lower than what you shared with us in the third quarter of that $450 million range. I mean, you did say the level of buybacks would depend on market conditions and market recovery came in later in the quarter. So my question is, should we expect to catch up in 2023 for coming in below your annual plan of $2.5 billion to $3 billion for the year to shareholder?

Deanna Strable:

Yes, I think it's important to go back and think about the underlying market conditions that underpinned our $2.5 billion to $3 billion at Outlook. And as we went throughout the year, obviously we saw equity market daily averages be 17% lower than what would've been included in that outlook and as impactful fixed income values were 18% lower. And obviously that range of $2.5 billion to $3 billion didn't contemplate that level of macro pressures as we went through the year. I actually think if you fast forward and look at our full year results, $2.3 billion to – relative to that $2.5 billion to $3 billion range, and the fact that even if you just look at the excess capital in our holdco and our lifeco, which was virtually $300 million at the end of the year. If you would've deployed that and again, going back to Dan's comment, given the volatility and the uncertainty on 2023 we made the decision to be prudent, we would've been at $2.6 billion. So while within that range, despite the macro pressure that we saw through the year and that macro pressure is on those fee businesses that have a higher level of free capital flow. So as we go into 2023 we're going to continue to be prudent. Obviously as we thought about fourth quarter, I'd say our excess capital ended the year slightly higher than what we thought. But there's always timing between when you put your share buyback plans in place and when you see some of that free capital flow actually materialized during the quarter. And as you mentioned, markets were actually throughout the quarter got more positive toward the end. So as we move into 2023 and we'll talk about it more on Outlook Call, we'll continue that. If things go well, there is a path to bringing down that level of excess capital. But our approach to capital deployment and capital management will be consistent with what you've seen throughout 2022.

Tracy Benguigui:

Yes. And just sticking with the macro, and you may touch upon this on your 2023 Outlook Call, if we enter recession this year, even a shallow one what type of credit risk and impairment scenarios are you thinking about? I remember back at the onset of the pandemic, you thought about $400 million to $800 million of losses that didn't end up materializing.

Deanna Strable:

Yes. A couple things I'll put into perspective there, Tracy. The first thing I would say is our balance sheet is different than it was when we went into the pandemic. So, the first thing you'd saw is we did reinsure $20 billion to $25 billion away. And so just on a dollar amount perspective, the credit losses that we would see in the drift impact would be lessened relative to that. I'd also say and point you to our investment portfolio that we gave a highlight of in our slides today. And if you look across that you can continue to see that we have a very high quality balance sheet that is also very well fit with our liabilities that we sit here today. We ended full year 2022 with actually positive impacts of drift and very little net income or capital gains and losses and so a very modest impact. We'll give more color on the dollar amount for 2023. But as we sit here today, we do think it'll go back to more of a normal level thinking that $100 million range but obviously very, very manageable when you think about capital. And we'll continue to make sure we update you on that as we go forward.

Operator:

Our next question comes from Erik Bass with Autonomous Research. Please proceed with your question.

Dan Houston:

Yes, I’ll try to make a couple of high level comments then throw it over to Amy to provide it. And you may have already seen Erik, I picked up in the Wall Street Journal a couple of weeks ago and it was January 26, but they had actually gone back to February of 2020. And in that period of time since February of 2020, SMBs under 250 employees had actually hired 3.67 million individuals and that was net of layoffs and quits. Likewise on employers more than 250 employees the large businesses if you will, they had cut net 800,000 jobs. Our focus is not on hospitality, it’s not on retail, it is really around the professional businesses. And Amy is really truly one of our experts around the SMB. So Amy, how’s it impacting our business? And then maybe we’ll get Chris to make a couple of comments on the retirement side as well.

Dan Houston:

Very helpful. Chris, anything to add on the SMB space?

Dan Houston:

Very good. Erik, follow-up?

Deanna Strable:

Yes, just a couple of comments. We do tend to see a little bit better free cash flow towards the end of the year. Some of that is just more due to movement in some of our unregulated businesses, and when we actually dividend up some of that capital. But again, we saw a continuation of just really good trends with all of our businesses really focused on holding the right amount of capital and only deploying capital when we could get the returns that we did. And so again, obviously that the fourth quarter deployment did include that approximately $200 million toward M&A. We had obviously earmarked that coming into the year and then made that we’re very pleased to make that deployment in fourth quarter, but there is some seasonality that makes fourth quarter a little bit higher relative to free cash flow.

Erik Bass:

Got it. Yes. Thank you.

Alex Scott:

Hi, good morning. My first question is on the net investment income and just overall sort of sensitivity to interest rates. I know, you all disclosed some sensitivities and, it’s fairly low, but there’s sort of two components to that, sort of the lost earnings from AUM declining when rates go up. But then also the benefits that you’d get in net investment income and the two things, the timing may not always match up and it struck me as a pretty strong quarter from a net investment income standpoint. So, I just want to understand like how we can expect that to unfold from here? What are the underlying elements within fee and retire – in the spread business in retirement that are benefiting from rates and to what degree should that continue as rates remain elevated?

Deanna Strable:

Yes, I’ll make some comments and then see if Chris has anything to add relative to RIS on lines of business. So first of all, I think it is important to understand that that sensitivity that we give is a trailing 12-month basis that kind of assumes the interest rate happens kind of at the beginning. We see very obviously negative pressure on our fixed income values that impacts our revenue in both RIS and PGI. And you kind of see that continue and then as you start to invest some new money, see some cash yields go up, you’ll see that the benefits start to offset that to then get to a pretty muted overall impact in the trailing 12 months. And so again, you did see that transpire in the fourth quarter. I do think it’s important when you look at our total company net investment income and compare it to last quarter, there’s kind of two dynamics I want to point out. One dynamic is obviously variable investment income was not as negative in the fourth quarter as it was in the third quarter. And then you also, because of equity method accounting for our Brazil joint venture, the strong earnings that we saw in Brazil partially due to inflation, it’s flowing through that line of business as well. So you need to kind of take that part out. And then what you’re getting to is, you are starting to see some impact from the higher interest rates. You’ll see that our new money that we’re investing in is earning a higher rate. We’re also because of increase in treasury rates, you’re going to see that what we’re earning on cash, what we’re earning on escrow and PGI is seeing some benefits from that. I do think it’s important to point out, especially in RIS, is that some of that increase you see in that investment income then gets credited back out to our customers in our BC&S line. And so it doesn’t fall to the bottom line as you think about that, But specifically to the bank and trust business in RIS, I think those are the businesses that are benefiting from those higher levels of interest rates. But I’ll see if Chris has anything to add there.

Dan Houston:

Very helpful. Alex follow-up?

Deanna Strable:

Yes, Alex, that’s exactly what you talked about is, we went through the process of LDTI, it actually allowed us to attribute the fees to how much is coming relative to the hedging cost of those – of how we manage that business and how much of the fees are other fees more relative to the non-hedging aspects of that product. And so again, that dollar amounts that we charge our customers for those hedging costs, we’ll move down below the line. Those are pretty stable quarter-to-quarter and they will then more offset the hedging gains and losses that always have shown up below the line in our realized capital gains and losses. So it’s exactly what you talked about. It had nothing to do with market value adjustments or any of those types of things that also could have arisen out of LDTI really, ours was really just that geography and attributive fees.

Dan Houston:

Thanks for the questions, Alex.

Ryan Krueger:

Hi, good morning. I have a question on more on consolidated G&A expenses, given that you took action, and didn’t have the normal higher seasonal 4Q expenses. I guess my question is like, as we look forward into 2023 like should we actually expect expenses to come down from the fourth quarter run rate given that there are, I assume still some seasonal things that impacted the fourth quarter? Or is that kind of a decent level to just think about going forward?

Deanna Strable:

Yes, a couple things that I’ll say there, we did say in our prepared remarks that we had about $15 [ph] million of severance and restructuring cost in the quarter. We did not identify that as a significant variance, partially because we saw, again as you mentioned, our normal fourth quarter seasonality of expenses did not materialize. And so even with those severance cost in there, our overall fourth quarter expenses actually were very aligned with what we wanted them to be. We have severance in every quarter, but obviously it was a little bit more elevated as we go in we went into the fourth quarter. As I think about 2023, you have a lot of moving parts, right? One moving part is some of our incentive compensation kind of resets and ultimately that could have an increase in some of our expenses as we go into 2023. But having said that, we’re going to continue to focus on all of our expense experts across the enterprise. You have highlighted kind of the alignment with revenue given macro, but as you’re also aware, we continue to make very good progress on the realization of our synergies in the RIS business as well as trying to manage through the stranded costs that came out of us exiting our retail fixed annuity and our ULSG lines of business. On both of those, we’re actually in line to slightly ahead of where we thought we would be at this point. And then we again have added in the efforts to also make sure, we’re aligning with the macro pressures while continuing to make the right investments to drive long-term growth. And so, it’s really hard to say where macro’s going to be as we go in. We’ve obviously had a really good start to January. I think all we know is that we think there’ll be continued volatility and we’re going to continue to do what we’ve done in any period of volatility and pressure is to make sure we align that expenses with revenue. Whereas if you look at both fourth quarter and full year, you can see our change in comp and other is very aligned with our change in net revenue, which I think is testament to that alignment.

Ryan Krueger:

Thanks. Follow-up was on the investment portfolio. I appreciate all the detailed updates that you provided in the slides. I guess – just on commercial mortgage loans that the LTV looks, continues to look very favorable. Can you give any color just on to what extent you’ve attempted to, I guess, reappraise the portfolio and reflect potential downside, the property value maybe particularly in office?

Pat Halter:

Yes, Ryan. Great. Sort of follow-up question, I think from a bottom up perspective, we are absolutely always interrogating our commercial mortgage portfolio and in our fixed income portfolio to make sure that we really understand what the macroeconomic environment is doing to each one of our investments. So, we have a very disciplined bottom up perspective to both our fixed income and our commercial mortgage portfolio relative to its position and resilience to what we believe would be a recession environment for 2023. But we also do a top down sort of model sort of stress analysis of our portfolio and on both sides of the analysis, both the bottom up and the top down, our commercial mortgage portfolio continues to hold up very, very well Ryan, and you highlighted some of the material that we already provided, but we continue to see very strong resilience in terms of the income durability of the investments we have in commercial mortgages. The area that you would imagine we take extreme sort of I think vigilance on right now is our office portfolio. We have about a 100 loans for about $3.5 billion in our office portfolio. But even there, as we do our sort of bottom up and our top down analysis, our office portfolio has a 52% loan-to-value debt service coverage about 2.7 times. It’s 90% occupied. That continues to hold up quite well. But as you can imagine, we’re doing again, a lot of bottom up on scenario analysis on tenant rollover, lease maturities, how much some of the properties are giving back space to the markets. And that will continue to be a very strong vigilance for us as we go into 2023, but we’re not seeing any sort of major problems surface yet in terms of our overall portfolio or in that office part of our portfolio Ryan.

Ryan Krueger:

Thank you.

Operator:

Our next question comes from Josh Shanker with Bank of America. Please proceed with your question.

Dan Houston:

I wish it were easier than it is, because as mentioned Josh, we actually have some third quartile performance that’s seeing large net cash flow and new sales a lot of attention. So the correlation sometimes, is very difficult. You’d think they’d be highly correlated, but the reality is, they’re not necessarily correlated and a lot has to do with its what’s in favor at any given time. But Pat, you can clean that up for me.

Dan Houston:

Quick follow-up, Josh?

Pat Halter:

Yes, it’s really great sort of follow-up too. We’re seeing the fixed income side some real strong interest, particularly right now auto blocks and 2023 and high yield. We’re seeing also a pivot again toward the emerging market debt space and we continue to see private debt, private credit interests from institutional investors. So institutional investors are engaged and fixed income in a very clear, purposeful way right now. And I think we’ll continue to see very long-term trends from institutional investors towards alternative investment classes, including real estate and including the debt capabilities in the private space.

Dan Houston:

Thanks, Josh.