Principal Financial Group Inc Q4 FY2024 Earnings Call

Good morning, and welcome to the Principal Financial Group Fourth Quarter 2024 Financial Results and 2025 Outlook Conference Call. I would now like to turn the conference call over to Humphrey Lee, Vice President of Investor Relations.

Thank you, and good morning. Welcome to Principal Financial Group's Fourth Quarter and Full Year 2024 Earnings and 2025 Outlook 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 Deanna Strable and Interim CFO, Joel Pitz, will deliver some prepared remarks. We will then open the call for questions. Members of senior management are also 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. Deanna?

Thanks, Humphrey, and welcome to everyone on the call. Before I begin this morning, I'd like to recognize Dan Houston for his leadership as our CEO over the last 10 years. He has been instrumental in setting our growth agenda and has led us through significant transformation. Principal is in a position of strength today and is well positioned for continued growth, thanks to his tireless leadership. It has been an honor to work alongside Dan over the last 7 years as his CFO. I look forward to building upon the strong foundation we've established under Dan's leadership. I am extremely grateful to continue to have him serve as the Executive Chair of our Board. This morning, I will discuss key milestones and highlights from the fourth quarter and full year 2024. Joel will follow with additional details. Principal delivered a strong 2024. We began the year with an ambitious outlook. We committed to growing earnings per share in the 9% to 12% range, targeting a 75% to 85% free capital flow conversion and expanding our ROE towards our targeted range of 14% to 16%. I'm extremely pleased that we've delivered on this guidance. Our adjusted non-GAAP earnings per share growth in 2024 was 11%, with a strong 16% increase in the fourth quarter. This was driven by strong top line growth across the enterprise, as well as the benefits from equity market tailwinds, which more than offset impacts from foreign currency. Our free capital flow conversion ratio ended the year at the midpoint of our 75% to 85% target, and we improved our ROE by 90 basis points year-over-year and are on track to achieve our 14% to 16% target in 2025. Our strong capital position and free capital flow enabled us to deliver on our capital deployment guidance. We returned $1.7 billion of capital to shareholders in 2024. Our total capital return to shareholders included share buybacks which were above the midpoint of our targeted range and a 10% increase in our annual common stock dividend. Our Board of Directors just approved a new share repurchase authorization for $1.5 billion. This is in addition to the nearly $800 million remaining under the prior authorization at the end of the year. At our recent Investor Day, we laid out our strategic areas of focus for sustained growth, the broad retirement ecosystem, small and midsized businesses, and global asset management. I'm happy to highlight some of our achievements related to these. As part of our retirement ecosystem strategy, we recently expanded our suite of target date offerings to now include both personalized and passive options, addressing the evolving needs of plan sponsors and participants. Our differentiated capabilities across retirement and asset management also led to an off-platform retirement investment mandate win of nearly $1 billion into our hybrid target date in the fourth quarter. This highlights our opportunity to unlock incremental value at the intersection of our businesses. Over decades, we have built a resilient and valuable SMB customer base. This segment is large, with significant opportunities for growth. We remain uniquely positioned to serve this market and look to expand on our leadership position in a disciplined way. In RIS, we continue to experience strong growth in this segment, with 8% recurring deposit growth in 2024 outpacing the large case segment. In Specialty Benefits, our customers, on average, have more than 3 products with us, up 4% compared to 2023. We have deep customer relationships, a strong leadership position and a long track record of above-market growth in the attractive SMB segment. In Asset Management, we continue to expand our private and multi-asset solutions, gaining traction in next-generation real estate and credit strategies with clients globally. Our largest real estate fund data center growth and income fund has currently raised over $3.6 billion across 11 countries in 18 months. This will materialize through net cash flow over time. Notably, new institutional clients represent 36% of the fund's total commitments. Beyond real estate, we are advancing our private and multi-asset capabilities, including the launch of a private credit REIT fund and the build-out of a private infrastructure debt team. Our clear strategy and strong execution across these 3 distinct growth platforms delivered strong results in 2024 and will continue going forward. We ended 2024 with $712 billion of total company-managed AUM, down 4% sequentially but up 3% from 2023. Strong market performance despite market volatility in the final weeks of the year more than offset the impacts from FX and net cash flow. Total company net cash flow improved for both the fourth quarter and full year 2024 compared to the year-ago period. Specifically, positive institutional and retail flows in the quarter helped to partially offset what is typically our weakest quarter due to seasonality in U.S. retirement sales and lapse activity. Now turning to our business segments. In Retirement, we generated strong revenue and earnings growth in 2024. This was driven by favorable market conditions and continued growth in our business due to the breadth and depth of our integrated suite of retirement solutions spanning recordkeeping, asset management and retirement income. The underlying fundamentals across retirement remain healthy. Recurring deposits for our total block in 2024 increased 7% over 2023, driven by the strength in the SMB segment. The number of individuals deferring and receiving employer matches are up 3% compared to the fourth quarter of 2023. In addition, the dollar amount of these deferrals and matches increased by over 7% during the same period. There is growing interest and participation in employer-sponsored retirement plans. Employers and plan sponsors are choosing to partner with us because of our full suite of solutions we offer and how we serve advisers, plan sponsors and participants. And while higher account values driven by strong equity markets over the last couple of years has led to an increase in withdrawal amounts, we are encouraged that the rate of participant withdrawals stabilized in the quarter. Contact retention rates also improved substantially in 2024 compared to the previous 2 years. Better retention and an improved sales pipeline are generating strong momentum in our business. Pension risk transfer sales were nearly $900 million in the fourth quarter, bringing our full year sales to over $3 billion at attractive returns. The PRT market remains robust, and we are positioned to take advantage of it. Our defined benefits business continues to be a valuable source for PRT new business, with nearly 40% of our 2024 new contracts coming from existing defined benefit customer relationships. In Asset Management, we realigned our businesses into investment management and international pension in the fourth quarter. Asset Management ended the year with $683 billion of AUM. Strong market performance in 2024 was partially offset by nearly $28 billion of FX impacts. Net flows for the year improved compared to 2023 in investment management as nonaffiliated flows benefited from improvement across all channels. We continue to evolve our global asset management business, positioning against new opportunities for growth and even stronger client outcomes. Our strategic focus remains on attractive businesses that leverage our competitive differentiators and leadership positions. As evidence of this evolution, we recently took several actions to streamline our business portfolio within asset management. Most impactful is Hong Kong, where a changing regulatory environment necessitates us evolving our presence in the market, focusing on our core expertise of retirement asset management while pursuing a new partnership with an industry leader in pension services. Our transaction with Bank Consortium Trust, or BCT, when approved, will transition our MPF schemes to BCT and expand our role as an investment manager with assets from the combined pension schemes. The financial impact has been factored into our outlook. Turning to benefits and protection, we continue to generate above-market growth of 7% in Specialty Benefits in 2024. This reflects net new business growth while maintaining pricing discipline. In life, our focus on the business owner is resonating as our business market premium and fees grew over 16% in 2024. As I look at the opportunities in front of us, I am confident in our ability to drive value through deeper market penetration in SMB, expanding our offering within the retirement ecosystem and sharpening our focus in global asset management. Before turning it over to Joel, I'd like to highlight 2 important recognitions we received recently. Principal was named one of America's Most Just Companies by Just Capital, ranking #11 on the 2025 Just 100 list. This recognition reflects our leadership in the industry and our commitment to serving our employees, customers, communities, and shareholders. Additionally, for the 13th consecutive year, Principal Asset Management was named a Best Place to Work in Money Management by Pensions and Investments, earning this recognition every year since the inception of the award. Recognitions like this reinforce our culture and core values, help us attract and retain top talent and allow us to stand out in the competitive marketplace. We closed 2024 with momentum across our diverse portfolio of businesses. Our success is a testament to the focus and hard work of our 20,000 global employees. Their ongoing commitment to excellence and to our customers enabled us to seize opportunities and has set the stage for future growth. Joel?

Thanks, Deanna. Good morning to everyone on the call. I will go over our financial performance for the fourth quarter and full year, provide updates on our investment portfolio and capital position, and share details about our outlook for 2025. For the full year, our non-GAAP operating earnings were $1.8 billion or $7.65 per diluted share, which is an 11% increase in EPS over 2023, comfortably within our guidance of 9% to 12% EPS growth. The quarterly results were also strong, with non-GAAP operating earnings of $485 million or $2.10 per diluted share, a 16% increase compared to the year-ago quarter. Full year reported net income, excluding exited business, was $1.5 billion, with credit losses and drift slightly better than our expectations. Non-GAAP operating return on equity for 2024 was 13.7%, an improvement of 90 basis points from the previous year, and we remain on track to achieve our targeted return on equity of 14% to 16% by 2025. The equity markets saw favorable conditions, with the S&P 500 gaining 25% for the year. Our diversified equity asset mix, along with our allocation to fixed income assets, leads to market performance that differs from the S&P 500. It is important to recognize the asset mix within our assets under management. Foreign exchange rates negatively impacted our assets under management by $28 billion for the full year and $17 billion for the quarter. However, equity market performance offset these impacts for the year. Our full year results reflect the strength of our integrated businesses, enabling us to meet our 2024 enterprise guidance of 9% to 12% EPS growth, with top line growth of 5% across the company in 2024. This, along with expense discipline while investing in our business, led to a non-GAAP margin expansion of 60 basis points. Regarding our Retirement and Income Solutions, full year pretax operating earnings increased 9% over 2023 due to strong business growth, favorable market conditions, and higher net investment income. We saw net revenue growth of 7% for the year, exceeding our long-term target. The 40% margin was at the high end of our guidance range. Principal Asset Management delivered solid results, with investment management's pretax operating earnings rising 6%, thanks to higher management fees from strong market performance. The operating margin expanded by 100 basis points despite limited contributions from performance fees. The international pension segment saw flat pretax operating earnings compared to 2023 due to foreign exchange impacts, but earnings increased by 9% on a constant currency basis. Specialty Benefits achieved 7% growth in premiums and fees compared to the previous year but faced challenges due to a large single premium sale in the fourth quarter of 2023. The loss ratio for the year was favorable at 60.4%, and the operating margin of 15% exceeded the midpoint of our guidance range. In our Life business, the growth in our business market surpassed the decline of the legacy block, leading to a 1% overall increase in life premiums and fees, with a 16% rise in the business market. We maintain a well-diversified and high-quality investment portfolio that is well-positioned for various economic conditions. Our average loan-to-value ratio of 50% and debt service coverage ratio of 2.3x reflect our commitment to risk management. As we enter 2025, we have resolved our 2024 office loan maturities and are optimistic about lower maturities ahead. On capital and liquidity, we ended the year with $1.6 billion of excess capital, which includes $830 million at the holding company. We returned $1.7 billion to shareholders in 2024, including share repurchases and dividends, surpassing our guidance. We have announced a $0.75 common stock dividend, representing a $0.02 increase from the prior quarter. Our results emphasize our balanced approach to capital deployment and commitment to returning excess capital to shareholders. For 2025, we are positioned to achieve our long-term financial targets, reaffirming guidance for earnings per share growth, free capital flow conversion, and return on equity. We expect to deploy $1.4 billion to $1.7 billion in capital, with the aim of providing strong EPS growth. For our business units, we are revising margin guidance upward in our Retirement and Income Solutions. In investment management, we expect revenue growth and margin within our set ranges for 2025. For International Pension, net revenue is expected to improve on a constant currency basis but will be challenged by market conditions. In Specialty Benefits, we anticipate premium fees to grow between 6% and 9%, with growth expected to improve throughout the year. In Life, we expect premium fees growth to be strong, particularly in our business market segment. As we open the call for questions, I want to highlight some seasonal impacts: the first quarter typically has lower earnings in investment management, and dental claims in Specialty Benefits are usually higher in the first half of the year. Despite this, we have a strong capital position as we start 2025 and are confident in our long-term financial targets, supported by our growth drivers. This concludes our prepared remarks. Please open the call for questions.

The first question comes from Ryan Krueger from KBW.

My first question was, 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?

Yes. Thanks, Ryan, for the question. I'll give a brief comment and then pass it over to Kamal. As you know, we've been in Chile for a long time, and we remain committed to supporting our customers there. We are optimistic that this reform will provide additional clarity on how we navigate the future, but it will take time to play out. With that, I'll ask Kamal to give a further update on what we're seeing there.

Sure. Thanks, Deanna. Just to add to Deanna's comments. So first, the reform will bring some positive changes. Particularly, they are reaffirming the defined contribution system, which is important to us and reducing inefficiencies, which will help improve the system's efficiency. We also anticipate a smoother transition to target date investment vehicles, which we believe is a key step forward for the marketplace. At this stage, we are confident in our ability to navigate these changes over time as we have done in the past and are optimistic about the long-term outlook for our business in Chile.

Yes, Ryan. And obviously, we'll continue to update as more of this gets firmed up as we move forward. But do you have an additional question?

Yes. This is a bit of a higher level question. There has been more talk of, I guess, particularly by 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.

Yes. As you know, we've obviously have a focus on private and have been in real estate for decades, but I'll see if Chris has some comments specifically around privates within the 401(k) lineup.

Yes. Thanks for the question, Ryan. Yes, I think we see, and I think the industry sees some significant opportunity for increased use of privates in retirement plans. There's obviously some regulatory hurdles that need to be overcome and some other issues in terms of liquidity buffers and the like that would need to be paired along for retirement customers. So we do think that there is significant potential for privates in retirement, but I think there is a little bit of work to do still on the regulatory environment and getting a product in a vehicle that works for sort of retirement customers. And I think that will take a little bit of time before we see momentum. I think you'll see it initially packaged in target dates or managed account offerings. So I think you'll see some innovation in that space over the course of the next year or two.

Thanks, Ryan, for the questions.

Our next question comes from the line of Joel Hurwitz with Dowling & Partners.

I wanted to unpack some of the comments you guys made on RIS flows. Could you provide some more color on just the level of stabilization you saw with participant withdrawals? And then just how much contract lapses improve year-over-year? And then, I guess, just any color on the pipeline as we enter 2025 and how the outlook at least maybe for the first quarter looks on flows?

Yes, Joel, thanks for the question. RIS had a great year when you look at the revenue growth and how that translated into margin and earnings. And as we've talked about in the past, that really is our primary focus. But I'll have Chris talk about all the specifics that you mentioned there, both for the year and the quarter as well as we think about first quarter of '25.

Thank you, Joel, and thank you, Deanna. As we've mentioned in prior quarters, our priority is on revenue and margin rather than flows. While flows are significant, our main focus is on achieving profitable revenue growth, which we accomplished in 2024 by surpassing our net revenue guidance and reaching the upper end of our margin. We're pleased with that outcome. It's important to note that rising equity markets positively impact our fee-based businesses; however, they also exert pressure on other metrics like net flows and fee revenue rates. In the fourth quarter, we saw improved fee-based flows both sequentially and year-over-year due to a healthy recurring deposit growth of over 6%. We also experienced strong transfer deposits and record retention in WSRS, driven mainly by a slightly lower participant withdrawal rate and fewer contract lapses, especially in the large market. Therefore, the fourth quarter’s flow performance can be linked to those stronger equity markets. Looking at the full year, we are noticing pressure from VA lapses, with about $1 billion in variable annuities with guaranteed minimum withdrawal benefits expected in 2024. Many of these are being exchanged for RILA, our registered index-linked annuity product with income. Although we are capturing a substantial portion in RILA, this change is shifting from a fee-based flow to a spread-based flow. Additionally, we continue to see robust health in SMB flows, with our recurring deposit growth exceeding averages and positive net cash flow in SMB. We feel confident about our position there. As we project into 2025, we currently anticipate that the participant withdrawal rate will stabilize while we continue to see healthy recurring and transfer deposits. However, flows may be influenced by higher market performance and the lasting effects of strong equity markets from 2024. We expect to see ongoing net outflows from the traditional VA block, reflecting an industry trend, though we are capturing a good portion of those in RILA. In the first quarter, there is one significant market outflow of about $2.3 billion, which will have minimal impact on fee revenue. We chose to terminate that relationship for profitable business considerations. Additionally, we anticipate a more normalized, possibly slightly lower contract retention rate compared to the record retention in 2024. In summary, while net cash flow is an important measure, different flows have varied profiles regarding revenue and profit. Our primary commitment remains focused on disciplined pricing, generating profitable revenue growth, and achieving our net revenue and margin targets for 2025.

We hope that helps. You have an additional question?

Yes. Then just shifting to sort of real estate transactional activity. What are you expecting for '25? And just any more color on variable investment income expectations and performance fees in Investment Management for the year?

Yes. Thank you for that question. Obviously, real estate is a core competency, both as we drive flows to unaffiliated clients, but also within our general account. I'm going to ask Kamal to give some general comments regarding kind of the state of the real estate market. And then I'll ask Joel to add in specific color regarding our general account and the implications on VII.

So let me pick up where Deanna left off on the state of the real estate market. So from where we sit, we do see commercial real estate sort of entering this early stages of a gradual but probably a more volatile recovery period than we have seen in the past. One of the things that has started to happen is we are actually seeing real transactional activity happen in the marketplace. And in parallel, there has been robust growth in CRE credit that is available to real estate transactions. Those are very important signals for this market to continue to expand. In fact, when you look at 4Q, there has been a substantial increase in equity transaction activity, 32% year-over-year. So clearly, transactions are starting to happen now, which is important because it leads to price discovery, and that allowed the marketplace to find a floor. The CMBS market has been unusually strong. We had over $100 billion of new issuance just in 2024. So that's certainly helping on the credit side. Just to look at our own book in 4Q, we almost put $1.9 billion of private capital to work. That was up from $1 billion earlier in the year. So I feel confident on the transactional side. I'll turn it over to Joel on the second part.

Yes. So Joel, thanks for the question. We do expect improved returns in 2025 relative to 2024 for all of our VII portfolio. And importantly, with key asset classes at or approaching long-term expectations in '25. And as you know, within our alts portfolio, real estate is a very prominent part of that, making up 50% of our portfolio, and we have much less concentration in PE and hedge funds. Real estate returns have improved from 2023 to 2024, and we expect that trend to continue in 2025. Given our strong capabilities that Kamal referenced, we invest directly in real estate. Therefore, these assets are not fair valued every quarter, as will be the case if we're investing under a fund structure. So as you can see in the investment supplement that we provided on Slide 5, these real estate properties are sitting in a meaningful unrealized gain position. So this appreciation and those unrealized gains will be recognized at the time of sale, resulting in some quarterly volatility within our VII metric. When this emerges, we'll be sure to highlight that activity over time, on which we expect to be weighted towards the middle and latter half of the year in 2025. So in summary, with some volatility along the way due to timing of sales, we do expect relevant improvement in VII for the upcoming year.

The next question comes from Wilma Burdis from Raymond James.

There has been some litigation in the larger segment of the PRT market. I understand that this is somewhat different for PSG, as there has been more focus on the offshore model. Do you see this potentially affecting the smaller segment of the market? Have you observed any activity in that area yet?

Yes. Thanks, Wilma, for the question. We've obviously been in the PRT business for decades, have great expertise there, and I'll see if Chris can directly answer your question regarding the recent litigation.

Yes. Thanks, Wilma. I mean I think as Deanna pointed out, we've been in this business for over 80 years and haven't ever missed a payment to a customer. I think we haven't seen the litigation migrate down. I think certainly, it's focused more on fee-backed providers of PRT transactions with one notable exception in a more traditional carrier. I suspect that they'll wait and see how those lawsuits turn out in terms of the validity of those lawsuits or not; again, I note, I don't believe any of those customers have not received their payments under those transactions. So I think from our perspective, it hasn't impacted our business. We haven't seen a lot of activity in the small to midsized business, and we remain a very trusted, reliable provider of risk transfer solutions for people that have pensions.

Thanks, Wilma, for that. We had a great PRT year, and we are confident that that's going to continue as we move into 2025. Do you have an additional question?

Yes, 80 years, a pretty good track record. Yes. 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?

Thank you, Wilma, for the question. Specialty Benefits had a remarkable quarter and an excellent year from an earnings viewpoint, which aligns with our long-standing commitment to driving profitable growth. Now, I'll hand it over to Amy to discuss what we are observing and how this relates to our discipline and approach to underwriting and pricing.

Thanks, Wilma. Thanks, Deanna. When we assess SPD and the various metrics we've provided guidance on for our outlook, it's important to consider how underwriting discipline plays a role. We've tightened both the loss ratio and margin ranges for our outlook, moving the margin to the lower end at 13% and lowering the loss ratio to 64%. We have also altered our overall premium growth to account for competitive factors that are central to your question. In terms of competition, we've noticed that the market became slightly more aggressive in the second half of 2024, a trend we expect to continue into 2025. The product facing the most competitive pressure is dental. Our industry has seen high utilization of dental services, leading to some repricing in 2024, which has affected new sales in the latter part of 2024 and will likely impact at least the first half of 2025. It's important to remember that we sell bundled products, and since dental is a significant part of that bundle, its performance affects other products as well. Over the long term, maintaining disciplined underwriting across all products is crucial for building and sustaining profitable growth and a solid portfolio. This discipline also ensures stable and predictable renewals, which both our brokers and employer customers rely on. In the small market, we need to ensure a more predictable approach, as cash flow concerns are critical for small and midsized customers. Thus, maintaining a stable, predictable cash flow is essential, even if it means sacrificing some growth for better margins and loss ratios. I'm confident that this underwriting discipline is integral to our long-term strategy. Our ability to grow faster than the industry will hinge on our deep understanding of the SMB market, our extensive broker relationships, our technology usage, and the service we provide. This combination gives me confidence in our outlook for 2025.

Thanks, Wilma for all the questions.

Thank you.

The next question comes from Alex Scott from Barclays.

I have some questions regarding the free cash flow. The outlook for capital return appears to be quite strong. Over the past few years, the actual free cash flow conversion of earnings has often exceeded your guidance. I'm curious about your thoughts on this. Are we looking at a further reduction of excess capital, or is the free cash flow conversion improving? How should I interpret this situation?

Yes, Alex, thanks for the question. When we think about it, we look at both kind of the ongoing free cash flow that is generated for our business and then how that translates into our capital deployment. And you're right, over the last few years, partially just because of how we've started each of the years and drawing that down, there's been a little bit higher of deployment from that perspective. But again, we like our business model and all I'll just ask Joel to add some additional flavor there.

Yes, Alex, thanks for the question. As you said, we're starting to position of strength, $1.6 billion of excess available capital coming into 2025. And if you look at our long-term guidance, which is 40% dividend payout ratio and share repurchase of 35% to 45%, our share buyback plan for 2025 is outsized. A lot of that is because we do have a strong excess capital position coming into the year. And so again, really proud of the results that we're delivering there on that front. And we feel really good about our $700 million to $1 billion target that we have for the year. We did hear some comments looking at the reports about it seems less. And the big reason it's less is because we drew down more coming into '25, and we did come in at '24. If you look at our RBC ratio coming into the year, it was 427% coming into 2024. And as we sit here today, it's 404%. So again, we're still at excess, but just not the excess we had 1 year ago. So again, outsized share buybacks, $700 million to $1 billion translates to about 40% to 60% payout ratio, above our guidance, and that's a product of our strong capital flow generation.

Thanks, Alex. Do you have a follow-up question?

I wanted to ask about what to expect on the fees related to RIS. Looking at your margins, which are at record or near-record levels, and also at Empower, which has achieved its best margins ever and is guiding for further expansion next year, how do you assess the competitive environment? Considering the robust profit margins of your business and some of your major competitors, are you noticing any indications that these strong margins might lead to increased pricing competition?

Yes. Thanks, Alex. I'll ask Chris to address that.

Yes, I believe our margin performance has been strong, and we anticipate it will improve beyond the levels we achieved in 2024. This market has always been highly competitive, and we consistently manage through fee compression. We're not experiencing anything notably different; it's just the nature of competition. There's an acknowledgment of the significant costs and complexities involved in managing a retirement business, which necessitates a reasonable return on the services we offer. I don’t perceive any irrational competition; it's simply a challenging environment. The industry is consolidating, and we are part of that process. While there have been some smaller inorganic transactions, a lot of the consolidation is happening organically now. In summary, it’s a tough market, but we are succeeding in it, and we are confident that we will continue to thrive as a significant player in this space.

And Chris, I think you've guided to that 2 to 3 basis point range, which is where we landed this year at the high end, just given the equity market improvement, and I think we're guiding to that same as we think about 2025 as well.

The next question comes from Jimmy Bhullar from JPMorgan.

So first, 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 because of some of the things you discussed on the call earlier. 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?

Thank you, Jimmy. I've reviewed your previous notes and analysis. You've pointed out the significant macro pressures from individuals who have been saving in 401(k) plans for decades and are now retiring. We are definitely observing some of that impact in withdrawal rates. I don't anticipate an immediate positive shift in the next couple of years, but you have also recognized the demographic trend that we will navigate in that time. We're seeing that the younger generations are saving earlier and contributing more compared to those from the Generation X era. While the long-term outlook for retirement savings is promising, we are experiencing some short-term flow challenges, as you have correctly mentioned.

Yes. Even with those negative flows, Jimmy, our account values are increasing sizably over the last few years, which obviously then does translate into revenue and earnings. So do you have a follow-up question?

Yes. Just for Amy on employee benefits, you've been in the process of repricing your dental book, I think, a couple of years now. But should we assume that that's done completely? Or is that an ongoing process? And margins, if we look stand-alone on dental, won't normalize until beyond 2025?

Amy, you can address that?

Yes. The majority of those actions are currently in progress. This means that some are already reflected in our results, while others will continue to emerge in the first half of the year. The key point to your question is whether margins for dental will improve as a stand-alone entity in 2025. The answer is yes. I expect the loss ratio to resemble historical patterns more closely, and I anticipate positive production from that line in 2025. It's important to note that we seldom sell these products individually; they are typically part of a bundle. As we mentioned in our opening comments, our average bundle, whether for new sales or existing policies, includes over three products. Therefore, it's uncommon for our relationships to depend solely on any single product in terms of pricing and collaboration.

Yes. And Jimmy, a couple of things there. One of the advantages of focusing on the SMB business is almost all of our business only has a 1-year rate guarantee. And then the other thing that I think is really important, really builds on Amy's last point, which is because there's bundles, you also have seen that we've had very positive underwriting results in life and disability. And so from a bundle perspective, we can take all of that into account, and they may see a little bit of increase in their dental rates. But as we look at the overall package, we can mute that increase across all of the products. And so again, feel good about how we're approaching that profitable growth and expect to see continued great results out of Specialty Benefits. So thank you, Jimmy.

The next question comes from Jack Matten from BMO Capital Markets.

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? I know you mentioned changes in Hong Kong. That changed throughout it at all, and were there any offsets in your other markets?

Yes. First of all, thanks for initiating coverage. And we look forward to interacting with you more as we go forward. I'll ask Joel to address that. Obviously, FX continues to be pressure as we think of international pension and we did have some impacts as well. But maybe as we think about the guidance, you can give some specific aspects there?

Yes, Jack, thank you for your question. Regarding the international pension segment, it's quite similar to what we experienced in 2024. On a constant currency basis, we achieved 4% revenue growth and 9% earnings growth in 2024. Looking ahead to 2025, we anticipate similar results. If we consider the midpoint of our projections, the changes in foreign exchange rates are what are leading us to expect relatively flat year-over-year results. However, it is important to note that we will continue to see margin expansion within this business. In 2024, we had a 100 basis point margin increase, and we expect further expansion in 2025 and beyond. We feel well positioned in our targeted markets and are optimistic about the growth potential in this area.

Jack, do you have a follow-up question?

Yes. And a follow-up on the investment management net cash flows. It seems like deposits are pretty healthy, but withdrawals continue to be somewhat elevated. I guess if you could just touch on trends impacting your net flows there and how you see things developing going into 2025.

Yes. I'll ask Kamal to give some color on that. If you do look at our overall net cash flow on an AUM level for the enterprise, even though it's still negative, we have saw a significant improvement, both for the quarter and the full year. But I'll ask Kamal to give some specifics on the drivers there and also how we're thinking about that as we go into 2025.

So I'll start with maybe the international pension piece first, when and give you more color on the flows. One thing I would highlight for you in addition to what Joel said is we actually also had positive net cash flow in our international pension business. When you look at '24, we actually had positive $600 million of net cash flow growth. So not only managing the business well, but we're actually attracting new dollars in a very mature business. But just turning back to Investment Management, I would say very, very strong results. Chris did talk about some of the affiliated flows. But when I look at nonaffiliated flows, we had a very strong quarter, almost $500 million of positive net cash flow. And the diversity of our cash flow is increasing. These flows came from multiple distribution channels for our clients, and they also came from a lot of international geographies, which is quite valuable for us. Just to highlight, net flows in international institutional were particularly strong. We had over a $2 billion large mandate win in credit. And then Deanna earlier talked about almost $1 billion win in U.S. retirement solutions. So really strong wins in that space. If I look at full year from our local regional clients, we had almost $2.7 billion positive net cash flow for all of 2024, a significant milestone for us. And sequentially, year-over-year, nonaffiliated cash flow is up by $6.5 billion. And I'll just remind you, this is what we laid out at Investor Day, the power of global asset management as we diversify our client base and channels, you could see that in those numbers. To the second part that Deanna raised, which is what do I see moving forward. I think we mentioned earlier that we are exceeding target on our largest real estate fundraise till date. It's going to be not only a milestone for us with respect to growing our business, we've actually added over 50 new sizable relationships across the world beyond just the clients we have historically had in public pensions. We have new relationships with foreign insurance companies now. We've added premier U.S. endowments and foundations and now we also have regional asset managers in Asia who are investing with us. So I would highlight that the momentum will continue to grow on the private market side. And the last thing I would highlight for you, as I look forward, we were also recently just highlighted as the top-performing investment grade U.S. bond fund this year in 2024, and that's a category that actually continues to get active management flows. So hopefully, that helped you.

Thanks, Jack, for the question.

The next question comes from John Barnidge from Piper Sandler.

So 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?

Yes. The first thing I would say there is, as you know, I was very involved in our recent strategic review that led to some really sizable changes to our business portfolio, but more importantly, put us in a great position to deliver on our strategic and financial objectives. We have the portfolio we need to deliver on what we laid out. But we will obviously continuously assess our portfolio, make changes as needed, derisk where it makes sense or in places where we just don't see the path to driving growth, we'll make the decisions to make pivots there. And you did mention the one that we highlighted in this call, which was somewhat driven by the regulatory changes that are happening in that market. And so again, bottom line, we feel good about where we're at, both from a product portfolio perspective and specifically in life and how we think about our risk exposure. But obviously, we'll continue to stay disciplined as we look at those facts going forward.

And my follow-up question, completely understand the primary focus of principal serving the small, medium-sized customer. But within your retirement and benefits business, can you talk about how much exposure or non-exposure? You have to government nonprofit or government contracting in your businesses?

Yes. I'll maybe just ask Amy and Chris to quickly address that. And if we don't have the answers here today, we'll make sure we get back to you. But Chris, anything from a retirement perspective?

I would say that we are not a large player in the governmental marketplace, John. So I don't have the exact composition of our business. We have some, but we're not known as a very large player in the governmental end of the business. But we could follow up with more details on the composition.

Yes, this is Amy. I'll chime in. I would agree with Chris's comment, I might even take it one step further for the Specialty Benefits business and say we are just not a player in the government marketplace. That's not been where we've seen some of our historical growth. And they tend to operate with a different set of variables that just don't align us clearly with how we build our machine and process and pricing and technology. And so we're just simply not a player in that market.

The last question comes from Suneet Kamath from Jefferies.

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? Just want to get your sense as you're now the CEO.

I will begin by saying that I was deeply involved in our strategy regarding mergers and acquisitions, so you shouldn't expect any major changes there. We are certainly keen on exploring M&A opportunities across all our businesses, and if we pursue any, they will be aligned with the growth areas we discussed during Investor Day. The portion of our overall capital allocation dedicated to this is minimal. It's also important to note that we have a very low leverage ratio. Therefore, if an opportunity arises that meets our three criteria—cultural fit, financial fit, and strategic fit—we have the capacity to take advantage of it if it makes sense. That said, we maintain a high standard when considering M&A and how it integrates with our growth strategy moving forward. To reiterate, based on our financial targets, we don't rely on M&A to achieve our goals; our organic growth engines can deliver those results. We will remain disciplined while also being open to opportunities that would be beneficial.

Got it. And then just real quick for Chris. Any thoughts around these in-plan annuity products for target date funds that a lot of asset managers are rolling out?

Yes. Thanks, Suneet. So we think they're promising. I think as I've mentioned probably on prior quarters, I think the opportunity to package them in some sort of target date fund or a managed account solution, probably the best solution to increase penetration. So we're sitting on the shelf. So more and more planned sponsors are open to having it as an option in the plan lineup, we're still just not seeing a tremendous amount of participant deposits and utilization yet. But I do think that will change as people start understanding it and as those designs improve and change and enhance over the next little bit. So a lot of activity. I think you'll see a lot of activity from us and others over the course of the next year or two in this space. And I do think if you think about sort of that last frontier to address, it's really how do you convert the savings that Americans have accumulated in their 401(k) plan into that guaranteed retirement income for them that they won't outlive. And so I do think that there's some real promise here, but it's still early days in terms of utilization.

Thanks, Suneet, for your questions.

We have reached the end of our Q&A. Ms. Strable, your closing comments, please.

Yes. Thank you. As we close today's call, I want to reiterate that 2024 was a strong year, capped off by a very strong quarter. We delivered on all of our enterprise objectives, and we're well positioned to continue this success in 2025. Our ability to access and grow in the most attractive parts of the market, combined with our disciplined approach to everything we do, positions us well for the future. We remain focused on executing the strategy that we laid out at Investor Day, and those priorities guide our decisions every day as we navigate this evolving landscape. Thank you for your time today, for your questions and your continued support of Principal. We look forward to connecting with many of you in the near future. Have a great day.

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