Principal Financial Group, Inc. (PFG) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Earnings and Revenue Growth: Principal Financial Group reported a 7% increase in EPS over the second quarter of 2023, with non-GAAP operating earnings of $386 million, or $1.63 per diluted share. This growth was driven by a 6% increase in net revenue due to business growth and favorable markets.

• Capital Return to Shareholders: The company returned $415 million of capital to shareholders in the second quarter, including $250 million of share repurchases and raised its common stock dividend for the fifth consecutive quarter.

• Strong Retirement and Asset Management Performance: Recurring deposits in retirement increased by more than 7% compared to a year-ago quarter, and PGI continued strong retail demand for mutual funds and ETF offerings.

• Acquisition of Ascensus' ESOP Business: This acquisition solidified Principal's position as the number one ESOP provider in the US with a 30% market share, adding 800 employer customers and over 165,000 new ESOP participants.

• Principal International and Benefits and Protection Growth: Principal International ended the quarter with $171 billion of total reported AUM, and the Benefits and Protection segment generated above-market premium and fee growth.

Pessimistic Highlights

• Market Performance Impact: The bifurcated market environment and the underperformance of mid-cap, small-cap, and international equities compared to the S&P 500 impacted diversified active asset managers like Principal.

• Foreign Currency Translation Headwinds: AUM was impacted by foreign currency translation headwinds of $9 billion in the quarter and $20 billion over the last 12 months.

• Negative Net Cash Flow in Asset Management: Despite strong momentum, PGI reported negative net cash flow of just over $2 billion, driven by a large lower-fee fixed-income redemption and stable value products outflows.

Company Outlook

• Confidence in Second Half Performance: Principal expects full-year results to be aligned with its 2024 outlook, anticipating strong growth across its businesses in the second half of the year.

• Capital Deployment and RBC Target Revision: The company plans to deploy $1.5 billion to $1.8 billion of capital for the full year, including share repurchases, and revised its RBC target to a range of 375% to 400%.

Q & A Highlights

• Q: In retirement, fee revenue looked a little light of what I was expecting. Anything unusual in the quarter? (Joel Hurwitz, Dowling & Partners)

  A: The net revenue growth of 8% is in line with expectations. Fee rate compression is less than 1 bp sequentially and about 2 bps on a trailing 12-month basis, mainly due to the impact of significant market outperformance and the diversified nature of equity exposure. (Christopher Littlefield)

• Q: Your full year guidance implies a pretty good step-up in EPS in the second half of the year. Can you touch on some of the key factors driving that? (Ryan Krueger, KBW)

  A: The guidance accounts for seasonality in SBD and PGI, natural growth of all businesses, reduced share count, and a pattern of higher EPS in the second half similar to 2023. (Deanna Strable)

• Q: On PGI and expenses, what drove expenses higher this quarter and how should we think about that for the rest of the year? (Wesley Carmichael, Autonomous Research)

  A: Expenses were elevated due to severance costs and investments back in the business, particularly in infrastructure debt. Despite this, we remain confident in our expense management capability. (Kamal Bhatia)

• Q: In pension risk transfer, are you seeing any impact from lawsuits against plan sponsors on volumes? (Wesley Carmichael, Autonomous Research)

  A: The market remains robust with industry expectations of $30 billion to $40 billion in PRT for the year. We do not see a slowdown and expect to be closer to $3 billion for the full year. (Christopher Littlefield)

• Q: Can you discuss the impact of advisors on rollovers in 401(k) participant withdrawals? (Suneet Kamath, Jefferies)

  A: Elevated withdrawals are primarily due to market performance. Advisors are being opportunistic with retirees, but we are seeing success in retaining assets through our IRA rollovers and in-plan solutions. (Daniel Houston and Christopher Littlefield)

• Q: Can you provide an update on the use of Bermuda for PRT and any capital relief? (Elyse Greenspan, Wells Fargo)

  A: Our Bermuda entity was created for new business and seeded with some in-force business. It allows us to go after a slightly higher volume of PRT cases for similar amounts of capital. (Deanna Strable)

• Q: Could you discuss resolutions in office maturities so far? (Mike Ward, Citi)

  A: We resolved all maturities to date with about $290 million remaining. The underlying metrics remain strong, and we continue to work towards positive outcomes. (Deanna Strable)