PRINCIPAL FINANCIAL GROUP INC Q3 FY2024 earnings call

Key Milestones

• Reported $412 million non-GAAP operating earnings or $1.76 per diluted share. EPS up 12% YoY. Returned $416 million to shareholders in Q3, including $251 million share repurchases. Total company managed AUM reached $741 billion, up 6% QoQ.

Financial Results

• Reported net loss $220 million but net income $419 million excluding impacts. Non-GAAP operating ROE 12.9% in Q3, on track for 14%-16% in 2025. Capital position strong with $1.6 billion excess and available capital. Announced $0.73 common stock dividend for Q4, a $0.01 increase from Q3.

Business Unit Details

• Retirement: Favorable market conditions and integrated solutions driving growth. Recurring deposits and contract retention strong. Pension risk transfer on track. Principal Asset Management: International growth, private real estate positive flows. Benefits and Protection: Premium and fee growth in Specialty Benefits.

Retirement

• Reported revenue and earnings growth above the high end of guidance. Recurring deposits increased by 10% year-over-year across all segments. Contract retention remained strong with lapse rates lower than a year ago. Pension risk transfer sales were nearly $500 million in the third quarter, year-to-date sales at $2.2 billion and on track for $3 billion full year. Total company managed AUM in retirement contributed to growth with account value growth driven by market performance.

Principal Asset Management

• Principal International had strong performance with record $185 billion AUM at end of quarter, up 8% from previous quarter, driven by net cash flows, market performance, and FX tailwinds. Positive net cash flows of $2.3 billion, with $2.1 billion from investment management flows. Private real estate strategies had $400 million positive net cash flow for 12th consecutive quarter. PGI had outflows due to lower fee and yield products and institutional rebalancing, but underlying momentum with global investors.

Benefits and Protection

• Specialty Benefits had above-market premium and fee growth over 6%, with more than half from net new business. Average number of coverages per customer grew 3.5% on a trailing 12-month basis.

Forward-Looking

• Full year EPS growth aligned with 9%-12% guidance. Targeted 75%-85% free capital flow for full year, on track to return $1.5 billion-$1.8 billion of capital deployments, including $800 million-$1.1 billion of share repurchases. 2025 non-GAAP operating ROE guidance 14%-16%. Expect seasonality in Q4 expenses but underwriting results in Specialty Benefits to improve.

Risks Identified

• Actuarial assumption review impacts with noneconomic effects, including model refinements and experience updates. Variable investment income pressure from negative private equity returns. Competitive environment in Specialty Benefits affecting growth. Real estate market uncertainties impacting transaction levels and returns.

Q: About Specialty Benefits growth slowdown, what are the causes?

A: Amy Friedrich stated growth slowdown due to no new PFML sales in Q3, competitive dental market, and need for consistent pricing. Dental loss ratio expected to decline in Q4 with repricing and AI-based technologies.

Q: On RIS participant withdrawals, what's the market impact?

A: Christopher Littlefield said market performance drives about 75% of participant withdrawals, with a slight uptick in rate from older participants. Underlying fundamentals like SMB flows and recurring deposits are strong.

Q: On PGI net cash flow, how are inflows and withdrawals playing out?

A: Kamal Bhatia said PGI had net outflows but Principal International had strong flows. PGI source flows in Q3 had retail breakeven, private institutional positive, offset by public institutional outflows. Performance fees expected lower in 2024 but private credit business ramping up.

Q: On real estate market optimism, any insights?

A: Daniel Houston and Kamal Bhatia agreed on improving real estate sentiment, noting positive portfolio returns and diverse property types, but transaction activity may be a longer cycle.

Q: On assumption review and lapsation, how does it affect charges?

A: Joel Pitz explained assumption review impacts are GAAP-only, noncash, with run rate impacts immaterial. Lapse experience in various lines contributing to charges, but customer staying longer is good for strategy.