Principal Financial Group Inc Q1 FY2024 Earnings Call

Thank you, and good morning. Welcome to Principal Financial Group's First Quarter 2024 Earnings Conference Call. As always, materials related to today's call are available on our website at investor.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 U.S. 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 U.S. GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. Dan?

Thanks, Humphrey, and welcome to everyone on the call. This morning, I will discuss key milestones and highlights from the first quarter as we continue to execute our strategy with discipline and focus and deliver strong results for our customers and shareholders. Deanna will follow with additional details on our results and our capital position. The first quarter of 2024 was a good start to the year for Principal. We reported $394 million of non-GAAP operating earnings or $1.65 per diluted share, an 11% increase in EPS over the first quarter of 2023. Across the enterprise, we continue to focus on growth while balancing disciplined expense management, investing for growth and innovation in our businesses and returning excess capital to shareholders. We remain well positioned to deliver on our outlook for 2024 as well as our long-term financial targets. We returned more than $360 million of capital to shareholders in the first quarter, including $200 million of share repurchases. We raised our common stock dividend for the fourth consecutive quarter aligned with our targeted 40% dividend payout ratio. Strong sales and favorable market performance contributed to total company managed AUM of $709 billion at the end of the quarter. We generated nearly $1.5 billion of positive total company AUM net cash flow after adjusting for the redemption in PGI that we discussed on recent calls. In Principal Asset Management, PGI generated positive institutional net cash flow as private real estate continued to attract investors, and we saw renewed demand for specialty fixed income investments. In addition, general account flows were also strong in the quarter. PGI sales were strong in the first quarter, including a rebound in U.S. mutual fund sales. It was the best quarter for mutual fund sales in 2 years driven by wins across equities and preferred securities. Principal International net cash flow was positive $1 billion, our strongest quarter since 2021, driven by robust sales in Brazil. Principal International ended the quarter with $179 billion of total reported AUM. Favorable market performance and strong net cash flow were more than offset by foreign currency headwinds, primarily in Chile. While persistently high inflation and low unemployment could keep the Fed from cutting rates in the near term, we remain optimistic that investors will continue to move money into longer duration and higher-yielding assets based on our engagements and conversations with customers and distribution partners. Turning to U.S. retirement, RIS generated strong revenue and earnings growth in the first quarter. Margins remained stable and at the high end of our guidance, as we continue to focus on revenue generation while investing for future growth. Importantly, the fundamentals of our retirement business remain healthy with strong contract retention as well as increases in recurring deposits, participant deferrals and employer matches. Total retirement sales grew 6% over the year-ago quarter, and the pipeline remains strong. This included more than $750 million of pension risk transfer sales in the first quarter, building on $2.9 billion of PRT sales in 2023 across 73 contracts. 2023 LIMRA rankings for PRT were recently released and Principal ranked #4 in industry based on premium and #3 for a number of contracts. We are the only PRT provider in the top 5 for both metrics, solidifying our leadership position in this attractive market and supported by our market-leading defined benefit business. We continue to leverage our favorable market position in the retirement industry with a full suite of solutions, and we are optimistic about the momentum we're seeing across our retirement platforms. This week, the Department of Labor published its final rule defining fiduciary investment advice under ERISA and revised related regulatory exemptions. Principal has a history of effectively adapting and responding to regulatory change while continuing to meet customer needs, and we'll do the same with this latest rule. We are analyzing the final rule and what it means to intermediaries we work with, along with our plan sponsors and participants. We are encouraged that the DOL confirmed and protected the importance of financial education within workplace retirement plans with language affirming that educational support to retirement savers enforces positive savings behaviors. Having said that, we remain concerned it will have an unintended consequence of limiting consumer access to meaningful financial tools and advice on top of creating significant compliance costs for firms. In Benefits and Protection, record sales, along with employment and wage growth, drove an 8% increase in premium net fees and specialty benefits over the first quarter of 2023. More than half of this growth is from net new business, demonstrating our competitive advantage by focusing on the unserved small to midsized business market. We continue to grow faster than the industry by deepening relationships with key distribution partners and with our customers. The life insurance premium and fees for the total block increased 4% over the first quarter of 2023, including a 23% increase in the business market. Our focus on business market and SMBs are driving growth across the enterprise. More than half of our first quarter nonqualified sales were part of a total retirement solutions plan. I'm excited about the opportunities across Principal and remain confident that our focus on higher-growth markets, combined with our integrated product portfolio and important distribution partnerships will continue to create value and drive growth. Before turning it over to Deanna, I'd like to highlight the strong progress we've made against our sustainability goals. We've taken a measured approach to sustainability, ensuring our commitments, such as supporting the growth of diverse small businesses, accelerating the execution of our business strategy. And in recognition of strong corporate governance, Principal is once again named one of the world's most ethical companies by Ethisphere, recognizing ethical leadership and business practices. This is our 13th time on this list since it was launched in 2006. Approaching our 145th anniversary, we've always recognized the importance of keeping our promises while building a track record of progress on issues that matter to our customers, employees, businesses and communities. Building trusted meaningful relationships across all stakeholders continues to be a bedrock for driving growth into the future. Deanna?

Thanks, Dan. Good morning to everyone on the call. This morning, I'll share the key contributors to our financial performance for the quarter as well as details of our capital position. First quarter reported net income was $533 million. Excluding exited business, net income was $376 million with minimal credit losses of $19 million. Excluding significant variances, first quarter non-GAAP operating earnings were $419 million or $1.75 per diluted share. EPS increased nearly 10% over the first quarter of 2023 and stronger than we expected heading into the quarter. This was aided by top line growth and market outperformance despite pressured foreign currency translation impacts. We're confident in our ability to deliver on our targeted 9% to 12% EPS growth for the full year. As detailed on Slide 12, significant variances impacted non-GAAP operating earnings by a net negative $34 million pretax, $25 million after tax and $0.10 per diluted share. Favorable encaje performance was more than offset by impacts from variable investment income and a GAAP-only regulatory closed block dividend adjustment in Life. Looking at macroeconomics in the first quarter, while markets were generally favorable across the board, the S&P 500 performed better than mid-cap, small-cap and international equities as well as fixed income and alternatives. While the S&P 500 is a conventional gauge for market performance, it is important to note that our equity exposure is more diversified. When you break down the equity portion of PGI AUM, approximately 40% of our exposure is S&P 500, 30% small and mid-cap, 20% international and 10% REITs. Foreign exchange rates were a headwind relative to both the first quarter and fourth quarter of 2023, but remained a tailwind on a trailing 12-month basis. Turning to the business units. The following comments exclude significant variances. RIS pretax operating earnings increased 7% over the first quarter of 2023, driven by growth in the business, higher net investment income and favorable market performance. Margin remained strong and at the high end of our guided range. PGI tax operating earnings increased 4% over the first quarter of 2023, as the benefit from market performance was partially offset by the impact of recent redemptions as well as lower transaction and borrower fees and immaterial performance fees. The expected first quarter seasonality that we discussed on last quarter's call played out as we anticipated. PGI had approximately $25 million of higher deferred compensation and elevated payroll taxes, slightly higher than the impact in the first quarter of 2023. NPI strong performance in Latin America was muted by impacts of unfavorable foreign exchange as well as macroeconomic headwinds in Asia. Specialty Benefits pretax operating earnings increased 12% from the first quarter of 2023, driven by growth in the business and more favorable underwriting experience. The underwriting results reflect the seasonal pattern of dental claims, which tend to be higher in the first half of the year. In life, pretax operating earnings were impacted by typical first quarter seasonality and some higher nonqualified surrenders, which can be volatile quarter-to-quarter. Across the businesses, we remain confident in delivering on our revenue growth and margin guidance for the full year, anchored to our long-term financial targets. Turning to capital and liquidity. We are in a strong position with approximately $1.4 billion of excess and available capital including approximately $1.1 billion at the holding company, which is above our $800 million targeted level and $300 million in our subsidiaries. Our risk-based capital ratio was approximately 400%, in line with our RBC target. As shown on Slide 3, we returned more than $360 million to shareholders in the first quarter, including $200 million of share repurchases and $162 million of common stock dividends. We continue to expect to deliver on our targeted 75% to 85% free capital flow for the full year. As discussed on last quarter's call, free capital flow is always the lightest in the first quarter due to timing of capital generation and increases throughout the year. We are committed to returning excess capital to shareholders and continue to expect $1.5 million to $1.8 million of capital deployment for the full year, including $800 million to $1.1 billion of share repurchases. The pace of share repurchases will increase throughout the year as free capital flow increases. Last night, we announced a $0.71 common stock dividend payable in the second quarter, a $0.02 increase from the dividend paid in the first quarter and an 11% increase over the second quarter 2023 dividend. This is in line with our targeted 40% dividend payout ratio and demonstrates our confidence in continued growth and overall performance. Our disciplined capital management strategy is aligned with our commitment to deliver long-term enterprise growth while allowing a significant amount of capital to be returned to shareholders. Based on net income, excluding exited business, we target 15% to 25% to organic capital to support growth in our businesses, 40% to common stock dividends, 35% to 45% to share repurchases and up to 10% to strategic M&A to enhance our capabilities and support organic growth. We remain focused on maintaining our capital and liquidity targets at both the life company and the holding company and will continue a balanced and disciplined approach to capital deployment. Our investment portfolio remains high quality, aligned with our liability profile and well positioned for a variety of economic conditions. The commercial mortgage loan portfolio remains healthy. Discussed on our last call, we had one scheduled loan maturity in the first quarter in our office portfolio, and it was paid off in January. The remainder of the office portfolio and the underlying metrics are relatively unchanged from last quarter. In closing, I am proud of our first quarter results, demonstrating the power of our higher growth, higher return and more capital-efficient portfolio. We are in a strong financial position and are well positioned to deliver on our enterprise 2024 targets, including 9% to 12% growth in earnings per share, increasing return on equity and 75% to 85% free capital flow conversion. We are grounded in our growth drivers of retirement, asset management and benefits and protection and executing on a strategy focused on continuing to drive long-term shareholder value. This concludes our prepared remarks. Operator, please open the call for questions.

The first question comes from Ryan Krueger of KBW.

My first question was on PGI flows. And I guess, in particular, can you provide some more color on the conversations you're having and kind of the optimism you discussed in the prepared remarks for continued improvement in allocations to yield products going forward?

Yes. Ryan. Thanks for joining the call. And Kamal Bhatia is here with us to replace Pat Halter. He's certainly getting well-grounded after having been with us now for 4 years and an industry vet. So with that, I'll ask Kamal to respond directly to you.

Thank you for your question, Ryan. I'll reiterate what Dan mentioned and provide additional insights regarding our sentiment. We experienced strong growth this quarter, particularly in the institutional sector with real estate and fixed income. Additionally, we achieved our best mutual fund sales in two years. From a global standpoint, here are three key points. First, we are seeing promising signs of recovery in retail, with more favorable momentum among our clients, especially related to our higher revenue fundamental equity strategies. While retail flows are inherently unpredictable, there is a shift in the dynamics compared to previous patterns, indicating more substantial movements rather than gradual increases. Second, we are observing preliminary positive developments in our real estate business. We have about $6 billion in unfunded capital commitments in our institutional real estate strategies, which we expect to utilize over the next 18 to 24 months, mainly through closed-end funds and separate accounts. We're identifying potential value in that market, but we will proceed selectively as opportunities arise. Notably, sellers are adjusting to a higher interest rate environment, which is favorable for us as investors. Finally, in our Global Asset Management segment, we had a strong quarter internationally, particularly in Latin America. We foresee continued positive momentum, especially from our Brazil pension business and Mexico funds. Overall, we are seeing encouraging signals in retail, increased interest from institutional clients, and growth in our international operations. Does that clarify things for you, Ryan?

Yes, that was great. And then just a follow-up was on the fee rate, down some year-over-year, 28 basis points in the quarter. What are your expectations on the fee rate in PGI going forward?

Yes. At 28 to 29 is where we said it would be and it falls within that range and maybe Kamal any additional comments you'd like to make here?

Sure, I'll share a few data points on that. As mentioned, we remain comfortable managing to our target range of 28 to 29. Regarding the first quarter, market conditions altered the product mix, which affected our revenue. If we exclude the previously discussed significant outflow at the start of the quarter, our flows were positive. Additionally, the revenue rate for the first quarter was influenced by annual price reviews of our U.S. mutual funds and some changes in real estate valuations from the fourth quarter, which also had an impact. Looking ahead, I believe the revenue rate will benefit from robust institutional real estate and fixed income flows. Our fixed income sales continue to excel in the high-yield credit space, which is one of our strengths and typically advantageous for management fee rates. We are also observing improvements in retail flows, which generally lead to higher revenue and margin products like equity mutual funds. It's important to note that client performance is a critical factor influencing flows and growth in management fees. We achieved a strong investment performance track record last quarter, particularly in our multi-asset strategies, which should drive future retirement flows. The increasing shift towards private assets appears to be improving as the year progresses and should enhance the performance rate as well.

The next question is coming from Suneet Kamath of Jefferies.

Just a question on RIS fee. I guess we're all sort of going on the assumption that we're going to be in a high for longer rate environment. So just curious if that's having any impact on the participant level withdrawals one way or the other? And maybe if you can talk a little bit about what you're seeing at the participant level maybe currently versus prior years?

Chris, please?

Yes. Thanks for the question, Suneet. Yes, on a participant basis, we are seeing a little bit of an uptick in the participant retirement withdrawals. So again, that's going to really be impacted both by the strong equity markets, which actually increases account values and then when they take the withdrawals that has of an impact. So we are seeing some elevated activity in participant withdrawals in the first quarter, and we'll be monitoring those elevated withdrawals through the balance of the year.

Got it. And then, Chris, please continue. I'm sorry.

I was going to first just make any comments with regards to the higher fees rate environment and how we might see that play its way through in terms of that capture perhaps benefiting that.

Well, we definitely are seeing the benefit from higher interest rates in RIS. And certainly, we're getting some benefit as we capture participant accounts on rollover to the extent that we capture those accounts, either an IRA rollover or SAFO, we definitely are seeing some benefit in bank in terms of those higher interest rates as well. So we do see retirement withdrawals. We capture some of those withdrawals on rollover and to the extent they end up within our bank product, we do see some benefit from that as well. Sorry to interrupt, you can go ahead.

That's actually where I was going to go next. I think, Dan, in the past, you actually used to give us a stat on that, like when you have a benefit event, what percentage of the assets you guys retain? So just curious if there is a stat that you can give us there? And I don't know if you have any sense on how that would compare to sort of the overall industry?

Yes. Suneet, on that one, I think competitors generally don't disclose that. And so we don't disclose that at this point.

In the past, we used to share that number, particularly relating to benefit events, job changers, and retirees. We are focused on identifying the best prospects for Principal, whether through partnerships with brokers who brought the business to us or on a direct basis. This aspect is crucial for creating value for our participants by providing them the choice during a benefit event to either purchase a Principal product or leave the money in the plan. However, measuring this can be challenging since we don't know how long the money will remain in the plan. There is a variety of measurements available in the industry. I hope this information is helpful.

The next question is coming from Wes Carmichael of Autonomous Research.

I wanted to stick with RIS maybe for a moment, but you mentioned the pipeline remained strong, and you called out PRT is one of those areas. Can you maybe just help us with what the size of that pipeline looks like and what you might be targeting in terms of sales or capital you want to deploy there for the year?

Wes, congratulations on joining Autonomous. I appreciate you being on the call. Before Chris goes into the details, I want to mention that Chris, his team, and I were together on the West Coast with our institutional client counsel and advisory group, and the feedback we received was very positive. We are seeing strong momentum with our customers as they help their participants become better educated and are very open to offering additional services to the plan sponsors. Additionally, the integration of IRT is behind us now, and the sentiment has been quite favorable. Chris, would you like to address the question directly?

Sure. I believe your question was about PRT, its momentum, and what we expect for the year. We had a strong start in the first quarter with PRT sales nearing $800 million, benefiting from strong momentum that carried over from the fourth quarter. We aimed to maintain a balance between gross and net bill growth in our PRT business alongside overall returns. Looking ahead, the industry is anticipated to generate another robust year in PRT, with total sales expected between $30 billion and $40 billion. We are targeting around $2.5 billion to $3 billion in PRT sales for the full year, with the majority of that anticipated later in the year as companies address their defined benefit pension liabilities in preparation for 2025. Consequently, we expect a seasonal increase in PRT activity during the late third and fourth quarters to continue.

And just on the Department of Labor, I know you're still in early innings of analyzing a very big document. But you mentioned a little bit in terms of increased compliance costs. Is there any way you can help us with sizing that? And what you think the increased expense might be associated with that based on what you know today?

Yes. My guess is that's going to be sorted out over the next 6 to 12 months as we continue to digest this most recent decision on the Department of Labor. It's something I've been involved with all the way back to 2010. One of the pieces of good news that came out of that is the regulation that provides a bit more clarity on guidance and advice in education at the work site, which we find very positive. But I don't think we've got this all sort of out, except to say that it will require more licensing on the part of some of our internal personnel. There's training that will need to take place. And of course, just the appropriate oversight and overseeing these registered reps and staying in compliance and working on matters related to transparency and disclosure. So we'll sort it out over the course of the next 6 to 12 months to keep you apprised of how that's impacting our business. Bottom line is it's something we view as manageable and quantifying the cost is not something we've put a figure on yet.

The next question is coming from Joel Hurwitz of Dowling.

I wanted to start on RIS fee rates. So the fee rate looked to be down around 2 basis points from where it ran in '23. Can you just provide some color on sort of the fee rate compression you saw in the quarter and the expectations moving forward? And then also in terms of the fee business, how much of the business has revenue that's based off of account value versus per participant fee?

Great questions, and I'll just have Chris pick that one up, Joel.

Yes. Great. Thank you, Joel, for the question. So we think fee revenue rate performed largely in line with our expectations this quarter. We've previously guided that we expect in the neighborhood of 2 to 3 bps of compression in normal markets. The one big couple of factors I'd point out, strong equity markets impact fee revenue rate. And when you think about the proportion that's asset-based versus either per member or transaction or flat fee based, about 80% of that revenue is asset based and around 20% is non-asset based. So as a result, when you see a significant equity market performance, it can impact fee revenue rate as the denominator tends to be more sensitive to equity markets than the numerator. In addition, there's fluctuation in fee revenue collection from period to period. And reminder that fourth quarter of last year, the revenue was quite strong due to seasonal demand for some consulting and other billable services. And as a result, because that fee revenue rate fluctuates from quarter-to-quarter, whether it's through the market or seasonality of fees or expenses of fees, it's better to look at it on a long-term basis. And when you look at the trailing 12-month period, the fee revenue rate held steady at about 40 bps. So that's the comment I'd give you on fee rev rate? Did that help Joel?

That helps. And then switching gears to Specialty Benefits. So sales were very strong, particularly in group disability. Could you just provide some color on what you saw in terms of the group disability sales? And then in terms of group disability top line overall, I guess, I was sort of surprised though to see it down from where it was in Q4 given the strong sales, anything that drove the sequential decline in group disability premiums and fees?

And I think it's another example of where Principal focuses on that SMB marketplace where we still see growth in a strong, vibrant SMB place in which we do business. So do you want to go ahead and cover that, Amy?

Yes, sure. Thanks for the question. So a couple of questions embedded in there, kind of what's going on, on that line and then let's look at it sort of sequentially. And the answer actually to both of those questions kind of comes back to the same product. So one of the newer products in that group and keep in mind, when we look at group disability, we're going to have long-term disability, short-term disability and that paid family medical leave is going to be on that line. One of the things we've seen happen is that markets state-by-state have kind of been opening up with paid family and medical leave products. So we participate in that marketplace. There's markets that we participate in, Massachusetts, Connecticut, Oregon, Colorado, and one of the things you're seeing flowing through those sales results is when you open up a state and when basically you say, we have put a product in front of the state. They've qualified that product. It's an improved private plan carrier and helps meet the state-driven mandate for meeting that coverage. When you're part of that grouping, then those new products all kind of come in at the same time. So those have been a little bit lumpier. What you're seeing in fourth quarter last year for PFML was one of the states that opened up that came in that quarter. And then you're seeing that again in the first quarter. Actually, the one that came in fourth quarter last year on that line item was even a little bit larger than what we saw in first quarter. But it's a good explainer for why that's moving up. When I look at short-term disability and long-term disability, those are growing in ways we expect them to grow. So we're seeing more like that 3% to 5%, 3% to 7% growth in some of those products in terms of new sales. Does that help give some color to that?

That does. It is very helpful. Thank you.

The next question is coming from John Barnidge of Piper Sandler.

Maybe if we could stick with that strong specialty benefit sales in the quarter. Can you maybe talk about growth from pricing versus employee count? It seems like there's pretty strong growth outside of just the paid family leave expansion.

Yes, I can address that. We continuously monitor our growth, and we are very pleased with what we're seeing. The growth rates in our specialty benefits line are encouraging. We analyze our premium growth by separating what comes from new business, employment or wage growth, and rate actions. This quarter, approximately 55% of our premium growth is attributed to new business. This is the largest portion, reflecting new clients acquired minus any lost accounts. About 40% comes from a combination of employment growth and wage increases, with employment growth being the larger contributor. The remaining 15% results from rate adjustments. Notably, the strongest employment growth is occurring in smaller companies, particularly those with fewer than 200 employees. The mid-market segment, defined as companies with 200 to 500 employees, is also experiencing solid growth, while growth in our largest segment, those with over 500 employees, is slowing down.

Hopefully, that helps John?

Yes, it does. It's very helpful. My follow-up question. You have attempt capital allocation to strategic M&A in the presentation. With the change in noncompete laws, how does that impact maybe how you approach recruitment and asset management?

Yes. Great question. And frankly, we don't use a lot of employment agreements here at Principal. I'd like to think the culture that we've built allows us to attract and retain talent for the organization. Within asset management, we're paying competitive fees. We have a lot of flexibility, and we've had frankly not a lot of turnover. So in the grand scheme of things, I don't really anticipate that that's going to alter Principal's ability to attract or retain talent. As it relates to our clients, in terms of opportunity, we know from the studies that go out there, the employee benefits matter, strong retirement plans, health care, specialty benefits. So we actually think it plays with the strength of making sure that the employment environment is healthy and people want to be part of that. The other thing, as you very well know, is we're a big player in the nonqualified deferred compensation space, which is another one of those areas where you think about locking in talent and having the proper plan designs. We do a lot of work with employers and designing ways to retain talent. Having said all of that, I'll see if Kamal has anything as it relates to anything within asset management.

No. John, just to add on, Dan covered it very well. I think you'll remember that we are one of those firms that continues to get year-over-year the reward for being best places to work in money management. And one of the reasons for that is the culture we have created in our Investment Management or Asset Management division. And 2 of those reasons are obviously the investment culture that really encourages independent thinking and independent growth, which is what the top tier investment talent always looks for. We don't have a top-down view. And our view is you can create an environment where the best investors can do their work without having a big legal structure around it. And so I would just point to that as the additional data point.

The next question is coming from Wilma Burdis of Raymond James.

Just talking about the Specialty Benefits loss ratio. It appeared to be a little bit favorable despite the seasonal impact. Could you talk about some of the repricing and should we expect it to continue throughout 2024?

Amy?

Yes, it looks favorable. I want to emphasize that we are likely going to be at the lower end of our long-term range. We've observed some repricing in both the market and our portfolio. However, this repricing has not followed a consistent direction. For instance, we've had to adjust our pricing to align with the emerging trends in dental, which involved some rate increases. Conversely, we have seen a need to reduce rates in certain areas of our disability block. Overall, we believe that the rate actions we are implementing, along with the current rate and competitive environment, will keep us at the lower end of that range.

Can you discuss some of the competitors in the smaller segment of the PRT market and elaborate on how you are sourcing those small PRT deals?

Chris?

Yes. Thanks for the question. Yes. So we certainly, over the last couple of years, have seen a lot of new entrants into the PRT market. I think what distinguishes us and gives us competitive advantage is the fact that we know the defined benefit business extremely well. We've been involved in it. We know that we provide consulting services on it. And as a result, when our customers look for solutions to defease that liability, they talk to us and we're able to provide them a solution that allows them to secure a good outcome for them. So if we think about our overall business and the type of business we get, we get about 20% in the first quarter, about 20% of the business came from existing customers, existing customers of Principal. And so we just play in a different part of the market. We also, as we talked about in the fourth quarter, have very strong onboarding capabilities that lets us take advantage of times when the PRT market is very favorable because onboarding tends to be a little bit of the pipeline thing that can close the pipeline for others. So we're used to doing lots of different contracts, which also gives us a diversity of the risk and then able to source a lot of them from existing customers of Principal, which, again, really believe gives us a competitive advantage in the PRT space.

Thanks. The next question is coming from Tom Gallagher of Evercore ISI.

On a recent earnings call, it was noted that group life pricing appears to be at its widest margin ever, which seemed quite extreme. They also indicated that they are experiencing fierce price competition and have lost some business. I'm interested in your specific observations regarding group life. Your quarterly results looked strong from an underwriting standpoint. Do you share this perspective? If so, how are you addressing the situation?

Good to hear from you, Tom. Amy?

Yes, I'll share my perspective on that. Our portfolio is focused on the small to mid-sized marketplace. When we work with smaller or mid-sized employers, we typically adhere to certain maximums, the types of coverage they desire for their executive populations, and our underwriting standards. We generally maintain a more standard approach, which means our amounts and coverages are quite conventional. Consequently, we don't need to make extensive adjustments to provide coverage for those executive-type populations. While I acknowledge the comment about competitiveness, our focus remains on the small to mid-sized marketplace, where we don't need to compete on those terms. We don't offer multi-year rate guarantees; instead, we provide single or occasionally two-year rate guarantees. We also don't usually compete on maximums and rarely extend beyond our consistent underwriting parameters. I feel confident about the market we're in. We observe rational competition for group life within this segment. We seldom write group life on its own and usually bundle it to meet the full needs of employers. Thus, we don't engage in competition based solely on a single product; it's a comprehensive offering tailored for the small market, and it remains quite reasonable in that space.

Yes, that's great color. So it sounds like that's really in the larger end of the market, then it's not filtering down to small to mid. Is that fair?

I have not seen it filter down. Correct.

All right. Great. And then, Dan, for my follow-up, just, I guess, Joel asked a question earlier on the fee proportion that's non-asset-based. And Chris, I think you said it was 20%. Just curious for that per participant price business, what has the growth rate actually been? Is this a fee pool that's growing or shrinking and by how much?

Yes. Tom, I would say that has stayed relatively stable in that, call it, anywhere between 17% to 20%. So we're not seeing a big increase. The big increase happened when we integrated the IRT block, which tended to be a larger customer. But we're a little bit more steady state now that we're 5 years beyond that acquisition. So I would say it's staying relatively constant.

And while it remains relatively constant, is it actually growing? Does it appear different or similar to the overall blocks in terms of net growth or shrinkage from an organic perspective?

It looks pretty similar to the overall block.

The next question is coming from Jimmy Bhullar of JPMorgan.

So most of my questions were answered, but maybe on individual life, to what extent were the weak margins this quarter an aberration or seasonality driven versus indicative of the earnings power of that business?

Amy?

Yes, happy to answer that. I see it more as a one-off, more as an aberration as you're saying, than indicative. We continue to see some seasonality with the business. We build a bit of that seasonality expectation in, especially for kind of that first quarter claims. What I would say is we do expect 2024 earnings to be higher than 2023. And we think the margin results, as we communicated in outlook expectations are going to be just below that lower end of that long-term guidance range. So we're seeing more of an adjusted margin expectation to be in that 13% to 15% range for the bulk of the year.

Okay. Dan, regarding the DOL rule, it seems like there was a chance it could have had a negative impact for you, but the carve-out that keeps employers from being classified as fiduciaries appears to be somewhat beneficial. Do you agree with that? Are there any other aspects of the rule that could be seen as positive or negative for Principal based on your initial evaluation?

Yes, Jimmy, thank you for the question. You are correct. One of our main concerns was our ability to provide education and guidance to plan participants in a way that wouldn’t classify us under the fiduciary rule. Many of these participants, especially those with lower incomes and smaller account balances, do not have financial advisers and rely on us for assistance and direction. The products available to them were selected by their employers, and defaulting to a target date option can be very beneficial. Previously, we faced limitations in providing guidance on taking loans or hardship withdrawals. Thankfully, it seems from the initial read on the regulation that we can continue to offer insights to participants as part of our normal business operations. Additionally, Principal has a 25-year history of offering advice and guidance to ensure the right products are available. In some cases, we refer participants back to the original adviser who sold the plan. Ultimately, it's important to ensure we have proper rules in place, necessary scripts, and compliance. We plan to navigate this situation as we have with past regulatory changes. I hope that clarifies things.

The next question is coming from Michael Ward of Citi.

Maybe for Kamal, and I'm just a little bit curious about private credit. It seems like a pretty solid growth area across the industry has been. Just wondering if you could remind us like how you're participating in that and if that could maybe bolster flows over the near term?

Mike, great question. Thank you for asking. I think we started organically a private credit business inside Principal. We are quite proud of the investment results we have generated with that business over the past 3 years. And as you highlighted, it's one of the high-growth areas in asset management. I'll give you a couple of observations on the marketplace today. One of the things we personally designed our expertise around was to be to the smaller and middle end of the direct lending space. which gives us an edge, both in terms of generating long-term performance, but also it was less covered by the larger private credit players. As you've observed, the industry has grown bigger and bigger and many of the large private credit operations are only operating at the large end of the marketplace, where I would observe there has been some reduction in pricing in terms of management fees, but also the quality of underwriting has become slightly less stringent. And so we remain focused on the smaller end where we find more alpha, but I'll also observe that from our seat, we have become more risk aware also in that space. We are passing on more deals than we have historically because we want to make sure the deals we get into will generate the IRRs we expect. And this comes a little bit from our culture as Principal, our legacy around high-yield credit has been to be much more smarter about risk management through a full market cycle, and that's our approach to private credit. I hope that answers the question, Mike?

Yes. No, that's helpful. Maybe for Deanna, I was just wondering on the Bermuda entity, I think that freed up like $200 million in the fourth quarter or last quarter. Assuming you kind of used that for PRT a little bit, maybe some life in 1Q. Just curious if there's any change. Should we think of that as maybe bolstering free cash generation? Or is it just kind of supporting the profile as it stands?

I'm glad you asked the question because you're on the verge of breaking a record of never having a question for the CFO. So I think Deanna is very enthusiastic about this response.

Yes. Thanks a lot, Mike, for the question. I actually just woke up, and so I can now answer the question. So a couple of things there. As you remember from our last call, we really started that entity to really support new business, both on the term life side as well as PRT. It really is going to allow us to look at more growth opportunities for the same amount of capital usage. And so if you actually just think about the first quarter, all of our new business for term was seeded over to the Bermuda entity. PRT is a little bit different in that we evaluate that on a case-by-case basis to understand whether that Bermuda entity is advantageous, and there actually wasn't any of our first quarter sales that utilized Bermuda. But we're still optimistic that we'll continue to be a good move for us as we continue to grow those businesses by doing it in a more capital-efficient way.

Does that help, Mike?

Yes. That's great.

The next question is coming from Wes Carmichael of Autonomous Research.

Maybe let's keep Deanna woken up. But on variable investment income, it was softer in the quarter, which I think is probably to be expected with lower real estate transactions, but maybe not quite to the magnitude that it was. So just hoping you could maybe share your perspective in the next couple of quarters and what your expectations are there?

Thanks, Wes, for your follow-up. You're right that we experienced some pressure on variable investment income this quarter. The factors affecting this were somewhat different than in the past. Overall, the income was lower than what we typically expect in the latter half of the year, aligning more closely with the first half of '23, but with varying drivers. We continue to observe minimal prepays this quarter and have seen decreased real estate activity. The main contributors to the underperformance this quarter came mainly from Principal International, which we don't expect to recur for the rest of the year. They have some real estate funds in their general accounts, and we marked those to market, resulting in a $13 million shortfall in variable investment income. While we saw positive returns in our alternatives portfolio, they were below expectations, particularly in private equity. Looking ahead, I expect that our investment performance will normalize, although we anticipate continued pressure on prepays. We adjusted our expectations for prepays entering 2024, considering the interest rate environment and our bond portfolio specifics. However, predicting returns from alternatives remains challenging, and we expect more quarterly volatility in that area. To provide some context on alternatives, we recorded about a 5% to 6% annualized return this quarter, while our expected run rate falls between 8% to 9%. Our private equity returns were even lower, yet still positive compared to that range. I hope this information is helpful.

Yes. Thanks so much. And maybe just a higher-level question. But with higher rates now, I guess one area where the insurance industry or the retirement industry has seen more growth has been in retail annuities. And I know you guys exited the fixed annuity business when you did your transaction. But curious if there's any consideration of maybe reentering that market especially now with the Bermuda entity.

Chris?

Yes. Wes, thanks for that. We continue to participate in the variable annuity market. And the only other thing I'd point out is in midyear last year, we did launch a registered index-linked annuity product which shows up a little bit more as in our spread based. That is a business that is nicely since its launch, and we've seen nice momentum in that RILA business. If you've been following the annuity trends, you know that the RILA space is the largest growing portion of the RILA market. So we do like that product. We think it's a nice product, provides a nice risk profile but that's probably the extent of it. We are not looking to launch new retail fixed annuities. We're focused on the variable annuity and the RILA offerings at this point.

Thank you. We have reached the end of our Q&A. Mr. Houston, your closing comments, please.

Well, we feel good about the start of the year, and we remain laser-like focused on delivering our 2024 outlook, including profitable growth, leveraging technology and innovating products. We want to make sure that we are maintaining our disciplined approach to capital deployment, which I discussed earlier. And of course, we always want to be mindful of aligning our expenses with revenues. And so with that, I look forward to visiting any follow-up, and I appreciate the support of the company. Have a good day.

Thank you. This concludes today's conference call. You may disconnect your lines at this time, and we thank you for your participation.