Principal Financial Group Inc (PFG)

• Principal International achieved record operating earnings of $121 million, record assets under management of $185 billion (up 8% from the previous quarter), and the highest net cash flows of $2.3 billion since Q1 2018. -
• The company remains confident in delivering solid earnings growth and positive net cash flows in Q4 2024, expecting low single-digit revenue growth and margins within guidance. -
• PFG anticipates improved underwriting results in Specialty Benefits in the fourth quarter, contributing to a strong earnings run rate. -

• Principal International expects tempered net cash flows in Q4 2024, indicating potential slowing momentum in its international business. -
• In-plan annuity offerings have not gained significant traction yet, potentially limiting growth opportunities in retirement services. -
• Slight uptick in withdrawal rates among older participants could impact assets under management as baby boomers retire, potentially reducing fee income. -

1. Capital Generation Outlook
   Q: What's the outlook for capital generation for the rest of the year and into 2025?
   A: Deanna Strable-Soethout expressed confidence in meeting their full-year free cash flow target of 75% to 85% of net income, with expectations of strong free cash flow in the fourth quarter. - She feels good about remaining within that target range for 2025 as well. -

2. Real Estate Market Recovery
   Q: What are your thoughts on the real estate market and its impact on investments?
   A: Daniel Houston and Kamal Bhatia agreed that there is a recovery in commercial real estate. - Kamal noted that their core real estate fund had its first gross positive total return in this market cycle - , indicating improving sentiment. However, transactional activity remains below historical norms due to crosscurrents like inconsistent economic data and geopolitical factors. -

3. Participant Withdrawals Affecting RIS Fees
   Q: How are participant withdrawals impacting the RIS fee business?
   A: Christopher Littlefield explained that the increase in participant withdrawals is primarily due to strong market performance, accounting for 75% of the withdrawals. - There's a slight uptick in the rate among older participants, contributing to 25% of the impact. - Despite this, they feel good about the underlying fundamentals of the business. -

4. PGI Performance and Net Outflows
   Q: Can you discuss PGI's improved momentum on gross inflows and increasing withdrawals leading to net outflows?
   A: Kamal Bhatia highlighted positive net cash flows from Principal International (PI), with record flows of $2.3 billion. - While PGI source flows were roughly breakeven in retail and positive in private institutional markets, higher outflows in public institutional markets affected net flows due to the lumpy nature of institutional activity. -

5. Assumption Review Impact on Life Earnings
   Q: How did the assumption review affect the Life Insurance segment's ongoing GAAP earnings and operating margins?
   A: Amy Friedrich stated that the results include any ongoing impacts from the assumption review, with run-rate impacts being immaterial. - There's a slight decrease in Specialty Benefits and Life, each less than $0.01 per share per quarter. -

6. Specialty Benefits Growth Slowdown
   Q: What are the drivers behind the slowdown in Specialty Benefits growth to 6%?
   A: Amy Friedrich explained that the slowdown is largely due to no new Paid Family and Medical Leave (PFML) sales, which were nearly $20 million in the prior year's quarter. - A competitive environment, particularly in dental, has also impacted growth. - They expect premium and fee growth to stay within the bottom end of their communicated range. -

7. Dental Experience and Loss Ratios
   Q: What are you seeing in dental experience with elevated loss ratios?
   A: Amy Friedrich noted that the dental loss ratio improved sequentially by nearly 400 basis points. - However, it's slightly above expectations due to dental being an inflationary product. - They've been taking measured pricing actions and expect dental loss ratios to continue declining in the fourth quarter. -

8. Severance Expenses Outlook
   Q: Do you have any plans for additional severance that will not be called out as a significant variance?
   A: Daniel Houston stated that they do not foresee any large severance adjustments on the horizon. - They constantly look for opportunities to be more efficient but do not expect significant severance expenses. -

9. PRT Activity and 2025 Expectations
   Q: What are your expectations for Pension Risk Transfer activity for the rest of 2024 and into 2025?
   A: Christopher Littlefield expects to deliver $3 billion in PRT sales at attractive returns in 2024, anticipating a robust fourth quarter. - He sees opportunities for growth in 2025 due to pension funds being highly funded. -

10. Strategies to Improve Net Flows
    Q: What strategies are in place to push towards positive net flows in PGI and RIS?
    A: Kamal Bhatia mentioned ensuring a robust pipeline of RFP activities, which are up 12% and have exceeded 2022 and 2023 levels. - They're expanding equity capabilities and seeing increased interest in their private credit business. - Christopher Littlefield emphasized focusing on profitable revenue growth, particularly in SMB flows, which are up 11%. -

11. Variable Investment Income Expectations
    Q: Should we expect variable investment income to be below long-term expectations going forward?
    A: Deanna Strable-Soethout indicated some pressure on variable investment income over the next few quarters. - While there was slight outperformance from real estate and strong equity returns, private equity returns were negative, and prepayments remained minimal. -

12. Principal International's Sustainability
    Q: Is the favorable performance of Principal International sustainable?
    A: Joel Pitz expressed confidence in delivering on the 2024 outlook, citing record operating earnings of $121 million, record AUM of $185 billion, and the highest net cash flows since 2018 at $2.3 billion. - They expect solid earnings growth and positive net cash flows in the fourth quarter. -

13. Withdrawal Rates Among Older Cohorts
    Q: Do you expect the uptick in withdrawal rates among older cohorts to have a more meaningful impact?
    A: Christopher Littlefield stated they are not seeing a significant increase in withdrawal rates. - While there's a slight uptick year-over-year, it was down sequentially, and they don't expect big changes. -

14. RIS Fee Revenue Decompression
    Q: Can you provide additional color on the RIS fee revenue decompression this year?
    A: Christopher Littlefield explained that the fee revenue rate is down about 2 basis points versus a year ago. - Strong equity markets are pressuring fee revenue rates due to the denominator effect. - They expect to be within their guidance of 2 to 3 basis points of compression for the full year. -

15. Exposure to Fed Funds and SOFR
    Q: Do you have any exposure to Fed funds and SOFR in terms of floating rate assets?
    A: Deanna Strable-Soethout stated they have very little impact from interest rates, with virtually no net exposure to floating rates. - They do not expect any significant impact from a drop in rates moving forward. -

16. Lapsations in Term Life Policies
    Q: How do lapsations of term life policies affect your earnings?
    A: Joel Pitz explained that lower lapsation rates mean customers are staying longer, which is positive, but it results in increased liabilities under accounting rules. - Amy Friedrich added that while it causes a charge, they like the strategy as it aligns with their focus on the business market. -

Annual guidance for FY 2024:

• EPS Growth: 9% to 12% - (no change from 9% to 12% - - )
• Capital Return: $1.5 billion to $1.8 billion, including $800 million to $1.1 billion in share repurchases - (no change from $1.5 billion to $1.8 billion, including $800 million to $1.1 billion - )
• Pension Risk Transfer Sales: $3 billion - (no change from closer to $3 billion - )
• Dividend Payout Ratio: 40% - (no prior guidance)
• Principal International Revenue Growth: Low single-digit growth, 6% reported, 5% constant currency - (no prior guidance)
• Principal International Margins: 30% to 34%, with a 50 basis point improvement - (no prior guidance)
• Specialty Benefits Premium and Fee Growth: 7.5% year-to-date growth - (no prior guidance)
• Variable Investment Income: Expected improvement - (no prior guidance)
• Fee Revenue Rate Compression: 2 to 3 basis points - (no prior guidance)

Annual guidance for FY 2025:

• Non-GAAP Operating ROE: 14% to 16% - (no prior guidance)