Q2 2024 Earnings Summary
- Principal Financial Group achieved $1 billion in Pension Risk Transfer (PRT) sales in Q2 2024, exceeding targeted returns and capitalizing on a robust PRT market expected to reach $30-$40 billion in 2024. The company leads in both the number of PRT contracts and premium amounts, focusing on small to midsize markets with attractive economics.
- Contract retention is at all-time positive levels across all segments, with no significant large case losses and increasing customer satisfaction and adviser NPS scores. The successful integration of acquisitions, like the Wells transaction, has reduced future risks and volatility.
- The company remains confident in achieving its full-year EPS growth guidance of 9% to 12%, supported by natural business growth, seasonality factors, and share repurchases contributing to a higher EPS in the second half of the year.
- Increased reserves for potential credit losses in the commercial mortgage loan portfolio, particularly in office properties, may signal heightened investment risk for PFG. The company reported $23 million of CML losses in the second quarter due to reserve increases, including a $15 million increase in loan-specific reserves across four properties and a $10 million increase in general reserves.
- Declining fee revenue rate in the Retirement segment could pressure future net revenue growth and margins. The fee revenue rate was down less than 1 basis point sequentially and down about 2 basis points on a trailing 12-month basis, even during periods of significant market outperformance. This decline may be due to fee compression and shifts in fee structures, potentially impacting profitability.
- Reliance on a significant earnings increase in the second half to meet EPS growth guidance poses a risk if macroeconomic conditions do not cooperate. The company needs to achieve an average of slightly over $2 per share in the next two quarters to meet its full-year EPS growth target of 9% to 12%, compared to $1.76 per share in the first half. This requires favorable seasonality and business growth but may be challenging if adverse conditions arise.
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EPS Guidance and Second-Half Expectations
Q: How will you achieve EPS growth in the second half?
A: Management is confident in meeting the 9%-12% EPS growth guidance for the full year, expecting an average of slightly over $2 per quarter in the next two quarters. This growth will be driven by natural business expansion, reduced share count from buybacks, and favorable seasonality in the dental and PGI segments. The pattern aligns with 2023, where EPS increased from $1.65 in the first half to $1.82 in the second half. -
Retirement Fee Revenue and Fee Rate Compression
Q: Why was retirement fee revenue lower this quarter?
A: Retirement fee revenue experienced a decline due to a decrease of less than 1 basis point sequentially and about 2 basis points over the trailing 12 months amid significant market outperformance. Contributing factors include non-asset-based fees not keeping pace with asset value increases, the impact of market performance patterns on average account values, diversified equity exposure with less correlation to the S&P 500, and increased use of guaranteed account products shifting revenue from fees to spread income. -
Use of Bermuda Entity and Capital Management
Q: How does the Bermuda entity impact your capital position?
A: The Bermuda entity allows for more efficient capital use by reinsuring new term life business and selectively certain PRT cases, enabling the company to pursue a slightly higher volume of PRT deals with similar capital levels. While not significantly freeing up capital, it enhances growth opportunities. Additionally, the target RBC ratio was lowered from 400% to a range of 375%-400%, reflecting a changed risk profile after exiting certain businesses, releasing approximately $360 million of capital. -
PRT Business Growth and Outlook
Q: What's your outlook for pension risk transfer sales?
A: The pension risk transfer (PRT) market remains robust, with industry expectations of $30-$40 billion for the year. The company achieved $1.7 billion in PRT sales in the first half and now expects to reach the upper end of its $2.5-$3 billion guidance for the full year, provided targeted returns are met. Strong capabilities and existing client relationships, especially in the small to midsize market, support this optimistic outlook. -
Participant Withdrawals Impact on 401(k) Business
Q: Are participant withdrawals affecting your 401(k) business?
A: There is a slight uptick in participant withdrawal rates, but the primary driver of increased withdrawals is higher account balances from strong market performance, leading to larger dollar amounts withdrawn. Retirees and job changers with larger balances are seeking advice and potentially rolling over assets, but the company continues to retain assets through its advisory channels and IRA offerings. -
PGI Net Flows and Performance
Q: How are you addressing PGI net outflows and performance issues?
A: Net outflows were impacted by the loss of a single $900 million low-fee mandate in long-duration fixed income, which was always low-fee. The company is focusing on higher-margin areas like real estate and private credit, with inflows of $500 million and $150 million, respectively. Despite short-term performance pressures, long-term investment performance is strong, and there's no direct correlation observed between short-term performance and flows. -
PGI Expenses and Margins
Q: What caused higher expenses in PGI this quarter?
A: Elevated expenses were due to $6 million in severance costs from staff adjustments and strategic investments in the business, particularly in infrastructure debt capabilities. These moves are part of adapting the investment model in a competitive environment. Management remains confident in expense management and margin outlook. -
Plan-Level Retention
Q: How is your retirement plan retention rate?
A: Contract retention rates are at all-time positive levels with no significant large plan losses. Improved customer satisfaction and advisor net promoter scores contribute to strong retention across all market segments. The company feels it has moved past the volatility related to prior integrations and is optimistic about current retention trends.