PRINCIPAL FINANCIAL GROUP INC Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Recognized Dan Houston's leadership over 10 years, Principal in strong position. Delivered strong 2024 results: adjusted non-GAAP EPS grew 11%, 16% in Q4. Free capital flow conversion at midpoint of target, ROE improved 90 basis points.
• Strategic areas: retirement ecosystem, small and midsized businesses, global asset management. Achievements include expanding target date offerings, off-platform retirement investment mandate win of nearly $1 billion, 8% recurring deposit growth in RIS, expansion of private and multi-asset solutions in Asset Management.
• Ended 2024 with $712 billion AUM, down sequentially but up 3% from 2023. Total company net cash flow improved for Q4 and full year 2024 compared to prior year.

Segment Performance

• Retirement: Generated strong revenue and earnings growth in 2024. Recurring deposits for total block increased 7% in 2024. Number of individuals deferring and receiving employer matches up 3%, dollar amount of deferrals and matches up over 7% in Q4 2024 compared to Q4 2023. Pension risk transfer sales were nearly $900 million in Q4, with full year sales over $3 billion.
• Asset Management: Ended 2024 with $683 billion of AUM. Investment management pretax operating earnings increased 6% in 2024 driven by higher management fees. International pensions pretax operating earnings were relatively flat in 2024 due to $26 million FX impacts, but up 9% on constant currency with 4% net revenue growth.
• Specialty Benefits: Experienced 7% growth in 2024. Customers have an average of more than 3 products with Principal, up 4% from 2023. Dental market was dynamic in 2024, leading to revising medium-term premium fees guidance to 6%-9%.

Guidance

• 2025 guidance: 9%-12% EPS growth, 75%-85% free capital flow conversion, targeting 14%-16% ROE.
• RIS revising margin guidance upward, net revenue 2%-5% intact.
• Investment management medium-term guidance on revenue and margin within ranges.
• International pension net revenue midpoint on constant currency, margin improving from 2024 levels.
• Specialty Benefits revising premium fees guidance to 6%-9%, growth near low end in 2025.
• Life premium fees growth at or above high end, margin guidance improved.

Risks

• FX impacts negatively affected AUM by $28 billion in 2024.
• Regulatory changes in Chile and Hong Kong could impact operations.
• Competition in retirement and benefits segments, especially dental underwriting pressures leading to revised guidance.
• Seasonality impacts on earnings (e.g., first quarter typically lowest for Investment Management) and flows.

Question and Answer

Q: Can you provide some initial thoughts on the pension reform that was passed in Chile and how to think about how that may impact Principal going forward?

A: Deanna Strable and Kamal Bhatia discussed Chile's pension reform, noting reaffirmation of defined contribution system, reduction of Incaje for efficiency, and smoother transition to target date investment vehicles, with optimism about long-term outlook.

Q: There has been more talk of alternative asset managers about getting more private assets within 401(k) plans. Would be interested in your thoughts on that and how that could evolve over time for the industry?

A: Christopher Littlefield mentioned potential for increased use of privates in retirement plans but noted regulatory hurdles and need for product in vehicle suitable for retirement customers, expecting innovation in target dates or managed accounts.

Q: Could you provide some more color on just the level of stabilization you saw with participant withdrawals in RIS and how much contract lapses improve year-over-year?

A: Christopher Littlefield stated lower participant withdrawal rate and lower contract lapses, especially in large market, attributed to higher-performing equity markets, with flows improved sequentially and year-over-year due to recurring deposit growth and strong retention.

Q: There's been some litigation in the larger end of the PRT market. I understand that the set of a different for PSG. Given some of that's been more focused on the offshore model. But could you see this moving into the smaller end of the market? Or have you, I guess, observed any activity yet?

A: Christopher Littlefield said litigation hasn't migrated down, focused on fee-backed providers, no impact on Principal's business, and remained a trusted provider in PRT.

Q: Can you just talk a little bit about what's going on in Specialty Benefits that you're exercising a little underwriting discipline in 2025?

A: Amy Friedrich explained dental market was dynamic in 2024, competition led to revising premium fees guidance, with underwriting discipline critical for profitable growth and stable renewals in SMB market.

Q: I had a question for Chris on flows in the RISP business. And I realize there's some seasonality inflows as well, but the flows have been negative for the past 3 years. Is it reasonable to assume that there's not going to be a major change in your flows at least in the next 1 to 2 years? Or do you think there's a chance that they turn positive? And if yes, what would change?

A: Christopher Littlefield noted short-term flow pressures from retirement withdrawals but long-term positive demographics, with generations earlier in careers saving more, but no immediate inflection to positive flows in next 1-2 years.

Q: The first question I had is on the international pension growth guidance. And I know you resegmented and changed the definition of net revenue there. I guess if you adjust for those 2 things, was there any change at all to the growth outlook?

A: Joel Pitz stated on constant currency, international pension had 4% revenue growth in 2024, and midpoint guidance for 2025 on constant currency, with margin expansion continuing.

Q: The Hong Kong change and then the YRT in the quarter kind of show a perpetual focus on improvement here. How much further derisking do you see either in international markets or within the life insurance business?

A: Deanna Strable said Principal continuously assesses portfolio, makes changes as needed, derisks where appropriate, with recent changes in Hong Kong driven by regulatory changes, and will stay disciplined in assessing risk exposure.

Q: The first question I had is on the Hong Kong change and then the YRT in the quarter kind of show a perpetual focus on improvement here. How much further derisking do you see either in international markets or within the life insurance business?

A: Deanna Strable said Principal continuously assesses portfolio, makes changes as needed, derisks where appropriate, with recent changes in Hong Kong driven by regulatory changes, and will stay disciplined in assessing risk exposure.

Q: The first question I had is on the Hong Kong change and then the YRT in the quarter kind of show a perpetual focus on improvement here. How much further derisking do you see either in international markets or within the life insurance business?

A: Deanna Strable said Principal continuously assesses portfolio, makes changes as needed, derisks where appropriate, with recent changes in Hong Kong driven by regulatory changes, and will stay disciplined in assessing risk exposure.

Q: The first question I had is on the Hong Kong change and then the YRT in the quarter kind of show a perpetual focus on improvement here. How much further derisking do you see either in international markets or within the life insurance business?

A: Deanna Strable said Principal continuously assesses portfolio, makes changes as needed, derisks where appropriate, with recent changes in Hong Kong driven by regulatory changes, and will stay disciplined in assessing risk exposure.

Q: Deanna, I wanted to ask about M&A now that you're in the seat. Your 0% to 10% capital allocation suggests kind of small deals. But if something big were to come along, similar to kind of IRT, is that the kind of thing you look at and say, we know how to do these deals, if it pencils out, we'd be interested? Or is it sort of the other way, where we've already done a big deal and we'd rather just focus on what we have and maybe take advantage of some lapses?

A: Deanna Strable said Principal is inquisitive about M&A opportunities across businesses, focused on growth areas, with high bar for cultural, financial, and strategic fit, but organic growth engines can deliver on targets.

Q: The first question I had is on the Hong Kong change and then the YRT in the quarter kind of show a perpetual focus on improvement here. How much further derisking do you see either in international markets or within the life insurance business?

A: Deanna Strable said Principal continuously assesses portfolio, makes changes as needed, derisks where appropriate, with recent changes in Hong Kong driven by regulatory changes, and will stay disciplined in assessing risk exposure.