Principal Financial Group (NASDAQ:) has announced a 7% increase in earnings per share (EPS) for the second quarter of 2024, reaching $1.63 per diluted share. This growth is attributed to a 6% rise in net revenue, driven by business expansion and favorable market conditions. The company also raised its dividend, marking the fifth consecutive quarter of such an increase, and returned $415 million to shareholders through share repurchases and dividends. With total company-managed assets under management (AUM) standing at $699 billion, Principal Financial Group expressed confidence in meeting its full-year guidance for 2024.
Key Takeaways:
– Principal Financial Group reported a 7% increase in non-GAAP operating earnings, with EPS at $1.63.
– Net revenue grew by 6% due to business growth and favorable markets.
– The company returned $415 million to shareholders and raised its common stock dividend.
– Total company-managed AUM reached $699 billion.
– Retirement business saw over 7% increase in recurring deposits.
– Principal Asset Management experienced strong retail demand for mutual funds and ETFs.
– Principal International reported $171 billion in AUM with net cash flow slightly positive.
– Benefits and Protection unit generated above-market premium and fee growth.
– The company revised its RBC target to 375%-400% and remains confident in meeting its full-year targets.
Company Outlook:
– Principal Financial Group is on track to meet its 2024 outlook.
– Expecting to reach the upper end of projected PRT sales of $2.5 billion to $3 billion for the year.
– The company is leveraging its Bermuda entity for term life insurance and some PRT sales.
Bearish Highlights:
– Slight decrease in earnings for Principal Global Investors (PGI) and Principal International units.
– Elevated participant withdrawals in 401(k) business, attributed to market performance and advisor influence.
Bullish Highlights:
– Continued strong growth in transfer deposits and pension risk transfer sales.
– Above-market growth in specialty benefits within the Benefits and Protection unit.
– Strong contract retention and positive customer and advisor satisfaction scores.
Misses:
– The company experienced CML losses of about $23 million in the second quarter, primarily due to reserve increases.
Q&A Highlights:
– Deanna Strable clarified that achieving the upper half of the EPS growth guidance requires robust second-half performance.
– Kamal Bhatia addressed elevated expenses in the PGI segment as investments in business infrastructure.
– The company discussed its approach to managing portfolio and capital allocation, focusing on small to mid-market opportunities.
Principal Financial Group concluded the earnings call by inviting stakeholders to Investor Day on November 18th, signaling transparency and ongoing engagement with the investment community.
InvestingPro Insights:
– Principal Financial Group (PFG) has demonstrated resilience and a commitment to shareholder value, as evidenced by its recent financial performance and strategic decisions. Here are some insights based on current data from InvestingPro that may interest investors:
– With a market capitalization of $19.61 billion and a Price to Earnings (P/E) ratio of 15.13, Principal Financial Group stands as a notable player in its sector. The company’s P/E ratio remains attractive, suggesting that it may be fairly valued in the current market.
– A notable highlight from InvestingPro is that Principal Financial Group has raised its dividend for 15 consecutive years and has maintained dividend payments for 23 consecutive years. This consistent dividend growth, which was 10.94% in the last twelve months as of Q1 2024, underscores the company’s commitment to returning value to its shareholders.
– Despite a challenging revenue environment, with a year-over-year decline of 13.67% in the last twelve months as of Q1 2024, the company’s net income is expected to grow this year. This growth in net income is a testament to the company’s operational efficiency and its ability to navigate market headwinds.
– InvestingPro Tips for Principal Financial Group also indicate that analysts predict the company will be profitable this year, with profitability already demonstrated over the last twelve months. However, it’s important to note that 7 analysts have revised their earnings downwards for the upcoming period, which may warrant investor caution. For those seeking more comprehensive analysis and guidance, InvestingPro offers additional tips on Principal Financial Group at https://www.investing.com/pro/PFG.
To gain access to these insights and more, investors can use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. With 5 additional InvestingPro Tips available, subscribers can deepen their understanding of Principal Financial Group’s financial health and market position.
Full transcript – Principal Fin (PFG) Q2 2024:
Operator: Good morning and welcome to the Principal Financial Group Second Quarter 2024 Financial Results Conference Call. There will be a question-and-answer period after the speakers have completed their prepared remarks. [Operator Instructions] I would now like to turn the conference call over to Humphrey Lee, Vice President of Investor Relations.
Humphrey Lee: Thank you, and good morning. Welcome to Principal Financial Group’s second quarter 2024 earnings conference call. As always, materials related to today’s call are available on our website at investors.principal.com. Following a reading of the Safe Harbor provision, CEO, Dan Houston and CFO, Deanna Strable will deliver some prepared remarks. We will then open up the call for questions. Other members of Senior Management will also be available for Q&A. Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events, or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company’s most recent annual report on Form 10-K filed by the company with the US Securities and Exchange Commission. Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable US GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. As a reminder, we are hosting our 2024 Investor Day on Monday, November 18th in New York. We look forward to seeing many of you at this event. Dan?
Daniel Houston: Thanks, Humphrey, and welcome to everyone on the call. This morning, I will discuss key milestones and highlights from the second quarter as we continue executing our strategy with discipline and focus to deliver strong results for our customers and shareholders. Deanna will follow with additional details on our results and our capital position. In the second quarter, we reported $386 million of non-GAAP operating earnings, or $1.63 per diluted share, representing a 7% increase in EPS compared to the second quarter of 2023. This growth was fueled by a 6% increase in net revenue driven by business expansion and favorable market conditions. Despite a market environment that has favored large technology stocks over mid-cap, small-cap, and international equities, we remain confident in the second half of the year and expect our full-year results to align with our 2024 outlook.
We returned $415 million of capital to shareholders in the second quarter, including $250 million in share repurchases. Our common stock dividend was raised for the fifth consecutive quarter, reflecting our targeted 40% dividend payout ratio. By the end of the quarter, our total company-managed AUM stood at $699 billion, despite foreign currency translation headwinds impacting AUM.
In the retirement sector, we continued to see positive fundamentals with recurring deposits increasing by more than 7% year-over-year. We experienced growth in transfer deposits, driven by the SMB market, and saw significant improvement in contract retention to offset participant withdrawals. Our defined benefits business remained a strong source of pension risk transfer sales, with nearly $1 billion in the second quarter.
Principal Asset Management saw continued sales momentum, particularly in private real estate and specialty fixed-income capabilities. Despite negative net cash flow in the second quarter, we expect improvement in the second half of the year as investors look to move funds into risk-based assets.
Principal International ended the quarter with $171 billion in total reported AUM, with positive net cash flow driven by contributions from Southeast Asia and Hong Kong. In Benefits and Protection, we experienced above-market premium and fee growth in specialty benefits, driven by record sales and strong retention.
Overall, we remain focused on providing strong long-term performance across our investment lineup and are optimistic about the growth momentum in the second half of the year. To emphasize this, the average number of coverages per active customer continues to rise and now surpasses three coverages per group benefits customer for the first time. I am enthusiastic about the potential opportunities at Principal and am confident that our focus on high-growth markets, integrated product portfolio, and essential distribution partnerships will continue to generate value and drive growth. Before I pass it over to Deanna, I want to highlight that Principal recently celebrated its 145th anniversary. I am extremely proud of how our company and our 20,000 employees consistently adapt to the evolving needs of around 64 million customers. Our focus remains on offering financial security to more individuals, businesses, and communities worldwide. Deanna?
Deanna Strable: Thank you, Dan. Good morning, everyone on the call. Today, I will discuss the key factors contributing to our financial performance for the quarter, as well as details regarding our capital position. In the second quarter, reported net income was $353 million. Excluding exited business, net income was $356 million with minimal credit losses of $25 million. Our non-GAAP operating return on equity of 13.1% improved by 80 basis points compared to the same period last year, moving closer to our target range of 14% to 16%. Excluding significant variations, second quarter non-GAAP operating earnings were $415 million, or $1.76 per diluted share. Earnings per share increased by 4% compared to the second quarter of 2023, driven by top-line growth and improved markets, partially offset by foreign currency impacts and a higher effective tax rate. During the quarter, we incurred one-time expenses, including state tax items and severance costs, which affected our results by approximately $0.09 per share. While these expenses were not considered significant variations, adjusting for them would have resulted in over 9% earnings per share growth compared to the same quarter last year. Foreign exchange rates continued to pose challenges to earnings, as the US dollar strengthened against Latin American currencies. Based on our first-half earnings and forecasts for the rest of the year, we are on track to achieve full-year EPS growth in line with our guidance of 9% to 12%. This indicates strong growth in the second half of the year across our businesses. For more details on the significant variations for the quarter, please refer to Slide 12. These variations impacted non-GAAP operating earnings by a net negative $38 million pre-tax, $29 million after-tax, and approximately $0.13 per diluted share. Notable variations include lower variable investment income in RIS and Benefits and Protection, unfavorable performance in Principal International, and a regulatory closed-block dividend adjustment in Life Insurance. Despite these variations, we remain focused on delivering revenue growth and achieving our margin guidance for the full year, aligning with our long-term financial objectives. Additionally, we have revised our RBC target range to 375% to 400% after careful evaluation of our capital levels, reflecting our commitment to managing capital effectively in response to external conditions and new business opportunities. We currently do not have any immediate plans to lower our RBC level and will continue to operate prudently within this range. Our estimated second quarter RBC ratio was 405%, resulting in approximately $1.6 billion of excess and available capital, including $800 million at the holding company, $450 million in excess above 375% RBC, and $300 million in our subsidiaries. In the second quarter, we returned $415 million to shareholders, with $250 million in share repurchases and $165 million in common stock dividends. This brings our year-to-date capital return to nearly $800 million. We anticipate achieving our targeted 75% to 85% free capital flow for the full year. We are committed to returning excess capital to shareholders and expect $1.5 billion to $1.8 billion of capital deployments for the year, including $800 million to $1.1 billion in share repurchases. The recent ESOP acquisition had minimal impact on our capital deployment plans. We have announced a $0.72 common stock dividend payable in the second quarter, a $0.01 increase from the previous quarter and an 11% increase over the third quarter 2023 dividend, aligning with our targeted 40% dividend payout ratio. We remain focused on maintaining our capital and liquidity targets while executing a balanced and disciplined approach to capital deployment. Our investment portfolio is high quality and well-positioned for various economic conditions. Our commercial mortgage loan portfolio remains healthy, with $290 million in remaining office loan maturities for 2024. We are confident in our ability to achieve our enterprise 2024 targets, including a 9% to 12% growth in earnings per share and increasing return on equity. We are optimistic about growth prospects in the second half of the year and remain dedicated to driving long-term shareholder value. We are definitely seeing an increase in the utilization of guaranteed account products in WSRS, which is a focus area for us. The growth in placements of our guaranteed products is leading to improved earnings, with the economics shifting from fees to spread. This trend is contributing to our success in earning placements in WSRS. During the quarter, it seems like there were around $1 billion in sales in the pension risk transfer market. Competitors had previously mentioned concerns about lawsuits against plan sponsors affecting market volumes, particularly with private equity-related companies. However, our outlook remains strong, with industry expectations of $30 billion to $40 billion in PRT for the year. We have been able to secure additional PRT business in the second quarter, exceeding our targeted returns and taking advantage of nice opportunities in the market. We don’t see any signs of the PRT market slowing down.
Regarding PGI net flows, we did experience an outflow of nearly $900 million in a low-fee fixed-income mandate. These mandates were always low-fee and were not converted over time. Despite this, our durable sources of net cash flow, such as real estate and private credit, continue to perform well and contribute significantly to our revenue and margins.
In terms of investment performance, while there have been fluctuations, we haven’t observed a direct correlation between short-term performance and flows. We have provided updated asset-weighted values to give a more complete picture of our business performance. Many of our strategies have strong performance metrics, with nearly 80% beating their benchmarks and generating alpha. Our focus on real estate and private equity strategies has also yielded positive results, giving us confidence in our investment results.
Overall, we remain optimistic about the market and our ability to generate and retain inflows despite challenges in specific areas. Given the strong performance in the RIS PRT volume and potential challenges in the fee business flows, will there be a greater focus on flows and business growth for the remainder of the year? Thank you.
Daniel Houston: Yes, we are very deliberate in balancing fee spread and risk in our business portfolio for effective risk management. The current opportunity in PRT is attractive with favorable return profiles and liability structures. Chris will provide more insights on the outlook for PRT in the second half of the year.
Christopher Littlefield: We have seen positive momentum in our PRT business, exceeding our sales targets for the first half of the year. We anticipate reaching the upper end of our sales projections for the full year and continue to focus on growth while ensuring appropriate returns on investments. Our comprehensive pension solutions and existing defined benefit capabilities position us well to capture opportunities in the PRT market.
John Barnidge: Are you observing an increase in average transaction size in your pipeline with the full suite of products and solutions you offer?
Christopher Littlefield: We primarily target the small to mid-size market in PRT and focus on areas where we see better opportunities and returns. Our approach allows us to capture attractive economics and leverage our strong onboarding capabilities. Additionally, our existing relationships with defined benefit clients contribute to our success in the PRT space.
Daniel Houston: Our PRT offerings are part of our broader TRS suite, allowing us to leverage our relationships with existing clients across different products and services.
Operator: Thank you, John.
The next question is from Elyse Greenspan of Wells Fargo. Please go ahead.
Elyse Greenspan: Can you provide an update on your use of Bermuda and any expectations for future usage, particularly in pension risk transfer deals?
Daniel Houston: Deanna will address this question, as our Bermuda entity was established for new business, including term and PRT. We have reinsurance arrangements in place for term life business and evaluate the use of Bermuda for PRT sales on a case-by-case basis.
Deanna Strable: Our term life new business continues to be reinsured to Bermuda, and we anticipate leveraging Bermuda for some PRT sales in the second half of the year.
Elyse Greenspan: Thank you. Any expectations for the back half of the year for VII?
Daniel Houston: Deanna will provide insights on that topic. I believe that when we analyze the pressured VII metric in comparison to previous quarters or on a TTM basis, there is some improvement. However, we are still experiencing pressure in the overall volume of variable investment income. The improvement in the current quarter was mainly driven by the returns from our alternative portfolio, which performed as expected. In contrast, in previous quarters, the returns were lower than expected.
Prepays and real estate transactions are two areas where we continue to face pressure. Due to the current interest rate environment and uncertainty about rate increases, we have had minimal prepays this year. Additionally, a significant impact on VII comes from real estate transactions, which have been minimal compared to the first two quarters of the year.
Looking ahead, we anticipate a potential increase in real estate transactions in the second half of the year, which could lead to an improvement in variable investment income levels. However, a substantial improvement will likely require a decrease in the interest rate environment, and we expect more significant improvements in 2025.
In terms of participant withdrawals in 401(k) plans, we have observed elevated levels, influenced by strong market performance and advisor involvement in rollovers for retirees. While there has been a slight uptick in withdrawal rates, the majority of the impact is due to market conditions. The market has inflated account values, leading to larger withdrawal amounts. Our focus on retaining assets through IRA rollovers has been successful, especially for individuals with lower account balances.
Overall, we are confident in the growth of our defined contribution business at Principal, and we believe we are growing at or above the industry average in terms of revenue rate. We manage and lead our retirement business as a whole, combining PRT and fee business components. Wilma, the decision to lower the RBC target was based on a strategic evaluation of our business mix, risk profile, and capital at risk analysis. We considered our competitors’ targets and consulted with rating agencies and regulators. The change from 400% to a range of 375% to 400% freed up approximately $360 million in excess capital. We will continue to monitor our risk profile and evaluate if operating at a lower RBC level is feasible in the future. Thank you for your question. Deanna Strable stated that there are no immediate plans to lower RBC to a certain level and that they will remain prudent in the current environment, which is expected to continue being volatile and uncertain. They anticipate operating in the upper portion of the targeted range for the foreseeable future, with some volatility quarter-to-quarter due to attractive organic growth opportunities. Overall, they feel good about their capital levels and their ability to return capital to shareholders. When asked about the potential capital benefits from using the Bermuda entity for PRT, Deanna mentioned that it would allow them to pursue a higher volume of PRT cases with similar amounts of capital, rather than freeing up a lot of capital. Regarding EPS trends and seasonality, Deanna noted that their performance for the first half of the year was in line with expectations, and they plan to provide more transparency on seasonality trends in the upcoming outlook for 2025. They also discussed office maturities and resolutions, stating that they have resolved all maturities thus far this year and have about $290 million remaining. Finally, Kamal was asked about PGI flows in light of a potential Fed rate cut, but the response was not included in the provided text. The question remains: Is the potential for a rate-cutting cycle leading to an increase in clients looking to invest their money today?
Kamal Bhatia responds by acknowledging the likelihood of a rate-cutting cycle beginning and discusses the impact on their current business and client engagement. He notes that there is a growing interest in longer-duration strategies on the fixed income side, particularly in high-quality, high-yield investments. Additionally, he highlights the potential benefits for their REIT franchise on the equity side, as equities typically respond faster to rate cuts than private equity real estate. Bhatia also mentions the positive trends in the real estate market, with new sources of refinance capital emerging, contributing to increased volume and engagement in the marketplace.
In conclusion, Daniel Houston emphasizes their focus on leveraging their product portfolio with distribution partners, targeting high-growth markets, and deploying capital strategically. He also stresses the importance of aligning expenses with revenues and investing for the future. Houston invites participation in their upcoming Investor Day on November 18th.
The conference call concludes with a thank you to participants, signaling the end of the discussion.
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