Earnings Call Transcript - PFG Q1 2021

Operator, Operator

Good morning and welcome to the Principal Financial Group First Quarter 2021 Financial Results Conference Call. There will be a question-and-answer period after the speakers have completed their prepared remarks. I would now like to turn the conference over to John Egan, Vice President of Investor Relations.

John Egan, Vice President of Investor Relations

Thank you and good morning. Welcome to Principal Financial Group's first quarter 2021 conference call. As always, materials related to today's call are available on our website. Following a reading of the Safe Harbor provision CEO, Dan Houston, and CFO, Deanna Strable, will deliver some prepared remarks. Then we will open up the call for questions. Others available for the Q&A session include Renee Schaaf, Retirement Income Solutions, Pat Halter, Global Asset Management; and Amy Friedrich U.S. Insurance Solutions. 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. We're looking forward to connecting with many of you at our 2021 Investor Day, which will now be held on June 29th. The event will be virtual and will share more details in the near future. Additionally, our 2020 Corporate Social Responsibility report was recently released and we launched a new sustainability subsection on our website. Our 2020 CSR report highlights several achievements from the year and new commitments we've made. View the report and learn more about our ESG strategy.

Dan Houston, CEO

Thanks, John and welcome to everyone on the call. This morning, I will discuss key performance highlights for the first quarter and the growing momentum we're seeing across our diversified business. Deanna will follow with additional details of our first-quarter results and our current financial position. 2021 is off to a strong start. We reported non-GAAP operating earnings of $424 million excluding significant variances; non-GAAP operating earnings increased 18% over the first quarter of 2020, driven by solid execution and improved macroeconomic conditions. We're very optimistic about the opportunities that lie ahead as momentum has returned in many of our businesses and we continue to see resiliency in small to medium-sized businesses. In the first quarter, we had strong in-group growth from positive employment trends and group benefits, and we had record sales in our retirement business while participant deferrals and company matches returned to pre-pandemic levels. We continue to be in a very strong financial position with $2.8 billion of excess and available capital. We deployed over $250 million of capital in the first quarter through share repurchases and common stock dividends. Last night, we announced a $0.61 common stock dividend payable in the second quarter, a $0.05 increase over the first quarter dividend. This increase helps us stay on track with our targeted 40% dividend payout ratio. We're confident that our businesses will continue to generate strong earnings and create long-term value for shareholders. We closed the first quarter with record total company AUM of $820 billion, an increase of nearly $190 billion or 30% over a pressured first quarter of 2020. This includes $19 billion of positive net cash flow, and we achieved record PGI managed and PGI sourced AUM of $508 billion and $250 billion respectively. Our diversified suite of products and solutions are in demand in the current market and continue to be relevant to institutional retail investors as well as our affiliated businesses. Investment performance remains strong; 57% of Principal mutual funds, ETFs, separate accounts, and collective investment trusts were above the median for the one-year time period, 77% for the three years, 76% for five years, and 89% for the ten-year. For our Morningstar rated funds, 71% of fund level AUM had a four or five-star rating. Longer-term performance, which drives our net cash flow, remained strong and positions us well to attract and retain assets going forward. Principal International reported $161 billion of AUM in the first quarter, a 15% increase on a constant currency basis compared to a year ago. China AUM, which is not included in our reported AUM, increased to $155 billion in the first quarter. Total company net cash flow was a positive $8 billion in the first quarter, $5 billion higher than the first quarter of 2020. ISP generated $5.7 billion of net cash flow, driven by a record $8 billion of Retirement sales growth in reoccurring deposits as well as low contract lapses in participant withdrawals. The pipeline is robust, especially in the large plan market, and is expected to drive strong growth in full-year sales. Participant withdrawals as a percent of average account values returned to pre-pandemic levels in the first quarter, a recovery that is expected to persist throughout the year. While PGI sourced the first quarter, net cash flow was a positive $400 million, driven by strong institutional flows; PGI managed net cash flow was a negative $500 million. To better meet customers' needs, we chose to move approximately $7.5 billion from mutual funds to collective investment trust in April. This will not impact second-quarter net cash flow, nor will there be a material impact on revenues or earnings. Principal International reported $1.4 billion of first-quarter net cash flow, the 50th consecutive positive quarter driven by Southeast Asia and Hong Kong. Although not included in our reported net cash flow, China had $34 billion of net cash flow in the first quarter. While China clearly benefited from money market funds being in favor in the first quarter, we're making progress to diversify our offering through our joint venture with China Construction Bank, including $360 million of positive net cash flow and equity strategies in the first quarter. In addition, our digital distribution continues to grow in China. We added 3 million new digital retail mutual fund customers and doubled our digital AUM in the first quarter alone. The pandemic continues to impact many countries we operate in. Brazil, in particular, industry-wide net deposits were down 19% from a year ago while we continue to lead the industry in pension deposits; first-quarter net cash flow of $100 million declined from the fourth quarter. And in Chile, first-quarter AUM was negatively impacted by $600 million from COVID hardship withdrawals, improved from $1.3 billion in the fourth quarter. I'll now share some additional execution and business highlights. Starting with the integration of the Institutional Retirement and Trust business, the integration is going very well and remains on track with a third successful migration occurring just last week. The migration of the retirement business will be completed in the second quarter and trust and custody in the third quarter. In total, we are adding more than 2.2 million retirement participants and approximately $140 billion of retirement account value through the IRT acquisition. Expense synergies will begin to emerge in the second half of the year and the transition services agreement will wind down by the end of the year. To offset some of the pressure on earnings, we're working on solutions to mitigate the impacts that the low IOER rate has had on the acquired trust and custody business. We're beginning to realize some tangible benefits of the IRT acquisition; having scale and additional distribution channels helped drive record retirement sales in the first quarter, and our pipeline has doubled compared to a year ago. As we're servicing more customers, revenue synergies are starting to build and exceeded our expectations in the first quarter, including IRT rollovers, automatic IRT, and asset management opportunities. This business is a powerful growth driver for Principal. We are increasing our scale to better serve small, medium, and large size clients; we're enhancing our capabilities and we have a more robust platform that is needed to compete in the retirement business moving forward. A few other business highlights to note in RIS spread - we had approximately $900 million of opportunistic MTN and GIC issuances in the first quarter. The IRT pipeline continues to build and we expect a robust second half of the year. Individual life sales rebounded with a 30% increase over the prior-year quarter, driven by non-qualified deferred compensation, an important component of our total retirement solutions and our small to medium-sized business strategies. A few weeks ago, Principal unveiled new Corporate Responsibility commitments to bring additional accountability to our ESG strategy. Through these commitments, we're pledging enhanced support for women and minority-owned businesses, continuing to nurture a diverse and inclusive work environment, and by 2050, we are targeting net-zero carbon emissions. As many of you are aware, we entered into an agreement with Elliott Management earlier this year to conduct a strategic review of our business mix, capital management, and capital deployment, as well as added two independent directors to our Board. The review, which is being led by the finance committee of our Board, is well underway and we'll share the outcome in late June. We are considering the entire spectrum of options to enhance shareholder value, meet the needs of our customers, and strengthen our position as an industry leader. We've had very insightful conversations with many of our investors and sell side analysts since reaching our agreement with Elliott Management in mid-February. I want to thank all of you for your candor and your perspectives. Our conversations with Elliott remain constructive. Last night, we announced Claudio Muruzabal. He's joining our Board of Directors. Claudio's immense global experience and leadership in the technology industry will bring valuable insights to our digital initiatives around the world.

Deanna Strable, CFO

Thanks, Dan. Good morning to everyone on the call. This morning, I'll share the key contributors to our financial performance for the quarter, the impacts from COVID, as well as our current financial position. The first quarter was a strong start to the year with net income attributable to Principal of $517 million, including $94 million of net realized capital gains with minimal credit losses. We reported $424 million of non-GAAP operating earnings in the first quarter, or $1.53 per diluted share. Excluding significant variances, non-GAAP operating earnings of $442 million, or $1.60 per diluted share, increased 18% and 19%, respectively, compared to the first quarter of 2020. As shown on Slide 4, we had three significant variances during the first quarter. These had a net negative impact on reported non-GAAP operating earnings of $25 million pretax, $18 million after tax, and $0.07 per diluted share. Pretax impacts included a net negative $21 million impact from COVID-related claims, a negative $19 million impact from IRT integration cost, and a $15 million benefit from higher than expected variable investment income. Specific to variable investment income, alternatives and prepayment fees benefited RIS spread in Individual Life by a combined $25 million. This was partially offset by a negative $10 million impact in corporate, as the increase in interest rates negatively impacted some mark-to-market fixed-income investments. The first quarter financial impacts from COVID were limited to mortality and morbidity, and RIS spread in US Insurance Solutions. With approximately 200,000 US COVID-related deaths in the first quarter, the net $21 million pretax impact was slightly better than our sensitivity would have suggested, primarily due to more favorable impacts in our RIS spread. For the full year, we're now estimating a total of 275,000 US COVID deaths or about 75,000 in the remainder of the year. This is slightly lower than what was anticipated in our outlook due to the vaccine rollout. We continue to see further recovery across our US businesses in the first quarter. Group Benefits and Group growth were a strong positive at just under 1% during the quarter, and dental claims returned to expected levels for the quarter. In the Retirement business, recurring deposits increased 10% compared to the first quarter of 2020, driven by an increase in both the number of people deferring and the number of people receiving, as well as the impact from the IRT migrations. Additionally, a record $8 billion of sales and low lapses contributed to the strong first-quarter net cash flow. Looking at macroeconomic factors in the first quarter, the S&P 500 Index increased 6% and the daily average increased 9% compared to the fourth quarter and 26% from the year-ago quarter, benefiting revenue, AUM, and account value growth in RIS-Fee and PGI. Foreign exchange rate tailwinds emerged in the first quarter, but remained a headwind compared to a year ago. Impacts to reported pre-tax operating earnings included a positive $3 million compared to fourth quarter 2020, a negative $4 million compared to first quarter 2020, and a negative $45 million on a trailing 12-month basis. Excluding significant variances, first-quarter results were in line with or better than our expectations for all of the business units. A few comments. PCI's trailing 12-month revenue growth of 2% was muted due to lower performance fees and transaction and borrower fees due to the pandemic. We expect to be at the high end of the 9% to 13% guided range for revenue growth for the full year. In Principal International, while encaje performance was $5 million lower than expected in the first quarter, it was offset by favorable variable investment income in Chile. Excluding the impact of foreign currency translation, Principal International's trailing 12-month revenue was flat compared to the year-ago with a 33% margin. Revenue growth is expected to improve throughout the year and to be within the 8% to 12% guided range for the full year. Turning to Capital and Liquidity on Slide 6. We remain in a strong financial position with $2.8 billion of excess and available capital, including $1.8 billion at the holding company, more than double our target of $800 million to cover the next 12 months of obligations, $575 million in excess of our targeted 400% risk-based capital ratio, estimated to be 437%, and $400 million of available cash in our subsidiaries. We expect the estimated 437% RBC ratio to move down toward our targeted 400% throughout 2021 as capital is deployed. Our non-GAAP debt-to-capital leverage ratio, excluding AOCI, is low at 23%. Our next debt maturity of $300 million isn't until late 2022, and we have a well-spaced ladder debt maturity schedule into the future. As shown on Slide 7, we deployed $252 million of capital during the first quarter, including $100 million of share repurchases. We remain committed to $600 million to $800 million of share repurchases in 2021. So far, in the second quarter, we've completed approximately $75 million of repurchases through April 26. Last night, we announced a $0.61 common set dividend, payable in the second quarter, a $0.05 or 9% increase from the first quarter, and our dividend yield is approximately 4%. During the first quarter, the impact from credit drift and credit losses was immaterial and we're now estimating a $100 million impact for the full year, improved from the $300 million estimate at the end of 2020. 2021 is off to a great start with record assets under management and strong earnings in the first quarter. The macroeconomic outlook has improved from year-end and will help fuel continued growth across our businesses. We're looking forward to welcoming the remainder of the IRT retirement customers to Principal in the second quarter and are excited for the opportunities that lie ahead. As John mentioned at the beginning of the call, I look forward to connecting with many of you at our virtual Investor Day on June 29, where we'll share our strategies for long-term growth. This concludes our prepared remarks, Operator, please open the call for questions.

Operator, Operator

Our first question comes from Jimmy Bhullar of JPMorgan.

Jimmy Bhullar, Analyst

So, I had a question on the Retirement and the Asset Management business, and you had very strong flows in your FSA business, and I think there are a couple of large wins. Typically, when FSA flows are strong, your Asset Management flows tend to be good as well. But I think in this case, the plans had more of an open architecture platform. So just wondering if that's a trend we should see going forward as well. And also how – what are the implications of this for your overall earnings for the enterprise, because in the past obviously, a majority of the FSA assets have been managed by PGI.

Dan Houston, CEO

Good morning, Jimmy. This is Dan, and it's a great question. Clearly, when you make an acquisition, the size of the Wells Fargo IRT business, we knew that it was going to come with larger plan capabilities. We also know that we had tapped into a new set of consultants and advisors that might bring us this size opportunity, so it's worthy of spending a few minutes to digest that. I'll have Renee talk about our continued commitment to the S&P market, but also this larger case market.

Renee Schaaf, Retirement Income Solutions

Absolutely, and Jimmy, thank you for that question. Let me first start by talking about the sales that we saw in the first quarter. They were very strong, and we're very pleased with the development so far. The most pleasing thing is that when we look at first-quarter sales, they were strong across all plan sizes: small, medium, and large. In particular, in the large plan market, we've seen very robust pipeline growth and corresponding sales, and of course, we did have two very nice large plan wins in the first quarter. The sales cycle is a little bit longer in the large plan market, so that will result in a bit of volatility in terms of when that business will close. A lot of that business may not become effective until 2022 just because of the long sales cycle. But nonetheless, we are very pleased with our sales across all plan size segments. The second part of your question was about asset capture and how we are driving assets to PGI. Principal is unique from the perspective of having a very strong track record in driving proprietary asset management capabilities in our new sales. While the industry average is somewhere around 30%, we routinely beat that, particularly in the small and mid-sized plan market. Larger plans can be expected to drive assets as well to PGI; an important source of that comes from the rollover opportunities, and also the small amount for subs. Additionally, we are introducing our proprietary asset management capabilities on a client-by-client basis, where it makes sense and where we compete very well.

Dan Houston, CEO

Jimmy, a lot to think about there. Any follow-ups?

Jimmy Bhullar, Analyst

Yes, just on the same topic, should we assume that your fee rate would decline as you become more competitive in the larger case market? Obviously, you can generate good margins if you've got scale, but in terms of the fee rate itself, should that be going down over the next few years as you're putting on more large case business?

Deanna Strable, CFO

Yes, so the average fee - if you look at the fees overall, you'll see that the highest fees are associated with the small plan market; of course, they scale down with the larger plan market simply because of economies of scale. In terms of overall competitiveness and what we're seeing in the marketplace, we see fee competitiveness across all segments, but I can't say that we see the fee pressures in the large plan market at a greater rate than what we see in the other sized markets. So again, we continue to see fee pressures; the whole industry sees fee pressures; you typically see higher amounts of these in the small plan market compared to the large, but we're not seeing disproportionate competitive pressure in the large plan market.

Operator, Operator

Our next question comes from Humphrey Lee of Dowling & Partners.

Humphrey Lee, Analyst

I guess just to follow up on IRT fees. I think in your prepared remarks you talked about the revenue synergies from the IRT block exceeding your expectations in the first quarter. Can you quantify that for us and how should we think about it as you continue to migrate the business into your platform?

Dan Houston, CEO

Yes, that's a good question. I'll have Renee speak to that. We made initial assumptions having underwritten this opportunity, and frankly, as I've said before on these calls, it's about a three-quarter delay from where we want it to be in terms of transitioning those clients over. We've now transitioned over very successfully three of the five blocks of business, with two remaining that will be completed by the end of the second quarter. The reason this is important is it allows us to retain a lot of business and also to be in a position to capture more revenue as well as more revenue opportunities. It also allows us to capture some expense synergies, so again hats off to Renee and her team for the strong execution here, but I'll have her speak specifically to your revenue questions, Humphrey.

Renee Schaaf, Retirement Income Solutions

Yes, absolutely, and thank you for the question, Humphrey. Our ability to work directly with the plan sponsors on revenue synergies increases as those clients begin to roll over to our platform. There are several opportunities for us to add to the revenue and capture synergies. First, our very broad total retirement solutions offering is key here. We are strong in defined contribution, defined benefit, ESOP, and non-qualified retirement solutions. One area is what additional solutions can we bring to the table for those plan sponsors and deliver in a very integrated way. We have seen good early success in bringing primarily defined benefit capabilities to the table. The second area is in the IRA rollover spectrum, as those participants come onto our platform and we can work within the benefit event to see results, this will create a nice lift to proprietary asset management flows.

Dan Houston, CEO

Any follow-up, Humphrey?

Humphrey Lee, Analyst

Yes, sure. So just on IRTs in terms of the flows, so clearly you start off first-quarter very strong. I think on the outlook call, you talked about the expectation for flows for 2021 being flat for the year. Given the strong performance in the first quarter, did that change your outlook for the balance of the year or were those two large case wins kind of expected in the other costs, although they didn't change it?

Deanna Strable, CFO

Yes, Humphrey, that's a great question. Let me tackle that by walking through each component of the net cash flow formula. In terms of transfer deposits, we've already talked about the fact that we're seeing good momentum in both pipelines and sales across all plan segments, and we anticipate that that will continue throughout 2021 and that we'll see good quarter-over-quarter increases in sales. The same is true for recurring deposits; we saw a 10% increase in recurring deposits in the first quarter, driven by increases in the number of people participating, as well as an uptick in the match and deferral contributions themselves. As the IRT block migrates over to our platform, the recurring deposits will begin to increase due to that IRT business now being on our platform, which brings us to withdrawals. We're seeing an interesting phenomenon this year related to strong market appreciation. We expect to see account values appreciate over 30% in 2021 driven by equity market performance and participant withdrawals from the IRT block of business. While this will be reflected in our block, comparing those dollar amounts of withdrawals to the average account values will show that we expect our results will be at the pre-pandemic levels, which is very favorable.

Dan Houston, CEO

That was a long explanation that hopefully... ...that helps, Humphrey.

Operator, Operator

Your next question comes from Andrew Kligerman of Credit Suisse.

Andrew Kligerman, Analyst

So I'm thinking a little strategically, Dan, at the beginning of the call, you were alluding to the Individual Life business being important to your S&P businesses, and I think Income Solutions sales were great. But I'm wondering if you could elaborate a bit more on strategically how that business fits in with your RIS businesses, et cetera. How important is it?

Dan Houston, CEO

Yes, let me give that at a high level and then kick it over to Amy. Our overarching strategy is the S&P market and larger employers, which we bolstered with the acquisition of the Wells Fargo IRT business. Some of those products within USIS service as strong vehicles for the funding mechanism. Non-qualified deferred compensation has compelling tax benefits. Life insurance is used for buy-sell and key person protections, and you can appreciate what a single mortality life can mean to a small to medium-sized business over the last 12 months. This anchors our thesis for being in those businesses. The same is true in our RIS spread business; we provide guaranteed income for our customers, and PGI manages a disproportionate percentage of those assets because they like to leverage the general account. It's a comprehensive business model we've built. I'll have Amy speak to first-quarter sales and projections.

Amy Friedrich, U.S. Insurance Solutions

Yes, thanks for the question. Dan, you did a great job setting this up and you hit exactly the right point, which is, we're happiest with our life sales and growth numbers when they are tied to the business market. One statistic we've provided is how much of our life sale is tied to that business market. We were at nearly 60% business market sales this first quarter. Above 50% is what we want to see as we look to provide great solutions tied into tax-efficient solutions. We intentionally tie this into our retirement business, which is one pillar of TRS to drive volume and good quality solutions. We've seen that reflected in our results, particularly with business owners and executive solutions. The marketplace has shown some difficulty for pure retail plays, but our business market focus and tie-in to strategy has been critical.

Dan Houston, CEO

Hope that helps, Andrew.

Andrew Kligerman, Analyst

Very much. Yes. So you get that sense of the integration, and it sounds like the IRT integration is going really well. Are you at this scale and position where you want to be, or could you find other businesses in RIS that you'd like to acquire?

Dan Houston, CEO

It's opportunistic. We definitely have a to-do list around capabilities, whether it's asset management or gathering assets globally. We need to digest the IRT acquisition. We feel good about what we have acquired and onboarding it with the successful completion by the end of the second quarter. We still have work left this year on trust and custody component and are aware winners and losers will emerge in this space. We'll continue to distinguish ourselves as a net winner.

Operator, Operator

Our next question comes from the line of Erik Bass of Autonomous Research.

Erik Bass, Analyst

I was hoping to get some more color on the international organic growth drivers in a couple of regions. In Southeast Asia, it looks like you had record net flows this quarter, so hoping you could discuss the drivers there. Then for Latin America, clearly there have been some headwinds from COVID and pension legislation changes, but can you discuss some of the current dynamics in the key markets?

Dan Houston, CEO

Yes, I'll handle Latin America and turn Southeast Asia over to Deanna. In Brazil, Mexico, and Chile, there are three forms of pension reform. Last night, their President Pinera allowed for the third distribution out of the 4A system, reducing our account values. This won't impact our revenues directly. Mexico achieved reform that will go from 6% to 15% contributions, but modifications in fees allowed to charge have brought near-term pressure. We are working to migrate our focus from fixed income to a balanced approach in Brazil. Claritas is an asset manager we fully own, doing quite well amidst challenges.

Deanna Strable, CFO

Thanks, Erik. The economic outlook in Southeast Asia mirrors what we see in the US; much liquidity prevails. Economic recovery is advancing, paired with good news on vaccination progress, and we continue to experience strong investment performance from our joint venture. The net cash flow for the quarter was strong at $900 million, driven half by institutional and retail, particularly in our equity funds. Some lumpiness could come from quarter-to-quarter in institutional money, but we remain optimistic about the net cash flow outlook for the remainder of the year.

Dan Houston, CEO

Thanks, Deanna. Any follow-up, Erik?

Erik Bass, Analyst

Great. I appreciate all the color there. That's helpful. Then Deanna, you had mentioned in the prepared remarks exploring some ways to offset the low IOER rate. The impact on the IRT Fee. I was hoping you could provide more color on what options you may have there on the potential benefit.

Dan Houston, CEO

Very good. Why don't we have Renee do that. They've done a good job navigating this.

Renee Schaaf, Retirement Income Solutions

Thank you for that question, Erik. We've identified solutions leveraging our strengths in collaboration with Wells Fargo that we believe could deliver attractive alternatives to customers, particularly in trust and custody. As this block of business migrates, we anticipate seeing some revenue replacement near the tail end of 2021 and into 2022.

Operator, Operator

Next question comes from the line of Ryan Krueger of KBW.

Ryan Krueger, Analyst

As the business starts to migrate over to the new platform in requirements, can you help us think a bit more about how to view the trajectory of expense savings as we go through the rest of 2021?

Dan Houston, CEO

Happy to do that, Ryan. I'll have Renee speak directly to migration issues and expense relief.

Renee Schaaf, Retirement Income Solutions

We're very pleased with the migration. Customers are being migrated smoothly with excellent communication with advisers. This migration will begin to roll off transition services costs in the last half of 2021, which will help margins increase to the 23% to 27% margin range reflected by the removal of these costs.

Dan Houston, CEO

Thank you, Renee. Appreciate the question, Ryan. Sorry to limit it to one. Operator, can we take the next call, please?

Operator, Operator

Our next question comes from John Barnidge of Piper Sandler.

John Barnidge, Analyst

Industry participants on the life side are targeting lower-income stratification, recently noted increased experience and death despair in their mortality book and increased impact from lack of medical treatment for heart and Alzheimer’s disease. Can you talk about what you're experiencing with this dynamic in general mortality trends beyond COVID?

Dan Houston, CEO

Happy to do that, John. Amy, please.

Amy Friedrich, U.S. Insurance Solutions

We saw the same reports that you've seen. We've taken a hard look at our individual life block as well as our Group Life block. We feel like we have the best claim data. What we're seeing is that we don't see anything beyond normal volatility in our portfolios. We understand there's larger discussions about perceived mortality trends occurring, but we’re not seeing remarkable patterns that differentiate us.

Operator, Operator

Our next question comes from Suneet Kamath of Citi.

Suneet Kamath, Analyst

Just a question on the acquired AUA. If we look sequentially, there was about a $31 billion drop in that balance despite strong markets and I didn't see any transfers into RIS fees. Is that just increased elapsation activity or is something else driving a bigger delta than we've seen in recent quarters?

Dan Houston, CEO

Yes, thanks for the questions, Suneet. Please, Renee.

Renee Schaaf, Retirement Income Solutions

Fourth quarter AUA ended at $685 billion, and we're now at $654. Market depreciation helped drive up that balance, but offset by the normal shock lapses we projected. Those shock lapses are predominantly on the trust and custody side of the house. That's the impact there.

Dan Houston, CEO

Hopefully that helps.

Suneet Kamath, Analyst

Yes, thanks.

Operator, Operator

Our next question comes from Tom Gallagher of Evercore.

Tom Gallagher, Analyst

I had a few questions on RIS-fee. Do you expect to still break even on flows after the strong start to the year? It sounded like that was partly related to the IRT assets, which I guess I don't think the bulk of those are currently included in the RIS fees. Would you expect to begin to include those either next quarter or 3Q whose flows are pretty big outflows in the IRT that you're not currently including and we're going to see a more complete picture?

Dan Houston, CEO

Yes, I appreciate that. Please, Renee.

Renee Schaaf, Retirement Income Solutions

First, when the IRT business comes over, it will be recorded under acquired operations accounting value roll forward. It does not come in through the net cash flow in terms of transfer deposits, but it will affect net cash flow as it will show in recurring deposits and withdrawals. We expect flat net cash flows for the rest of the year and are positive about the first quarter.

Dan Houston, CEO

Tom, did I get it done?

Tom Gallagher, Analyst

It did. And just to be clear, will the bulk of those assets be reflected in the roll forward in Q2 or Q3?

Renee Schaaf, Retirement Income Solutions

The retirement business will show up in Q2 and the trust and custody migration is slated for September.

Operator, Operator

Our next question comes from Joshua Shanker of Bank of America.

Josh Shanker, Analyst

If we go back a year ago, when people were embracing a COVID-19 mentality, were there shifts in strategies? Did certain funds see inflows or outflows? Are we seeing that again right now in the reopening? Does Principal have enough strategies to meet the needs of all its customers or do they have to go elsewhere?

Dan Houston, CEO

I would like to put this question to Pat, and one we’ve discussed internally with great depth.

Pat Halter, Global Asset Management

Thanks for the question. We have 80 mutual funds and ETF offerings, with around 36 in four and five-star Morningstar-rated funds. We are positioned well whether it was in March 2020 or April 2021. There has been significant rotation in the last two quarters; we provide strong capabilities for the changing equity markets. More pronounced are our private real estate capabilities. We see a substantial increasing focus on alternatives as investors seek diversification and asset classes beyond public equities.

Josh Shanker, Analyst

I think that's useful. I'll come back and join later for more detail.

Dan Houston, CEO

Thanks, Josh. We'll dive deeper as you ask.

Operator, Operator

Our next question comes from the line of Tracy Zionkowski of Barclays.

Tracy Zionkowski, Analyst

Your guidance for full-year capital deployment of $1.4 billion to $1.8 billion, including $600 million to $800 million of buybacks, has not changed. However, you mentioned credit drift expectations of $100 million down from $300 million. Could your capital deployment targets potentially be raised in light of the healthier credit trajectory?

Dan Houston, CEO

That's a good question. I'll ask Deanna to provide her thoughts.

Deanna Strable, CFO

The ongoing strategic review's impact may influence our capital deployment outlook. We'll continue to evaluate that as we progress. We might be shy of a run rate getting us to $1.4 to $1.8 billion in the first quarter, but we remain on pace. We'll work with our Board and the Finance Committee on our capital deployment plans as they evolve.

Dan Houston, CEO

Thanks for the question, Tracy.

Operator, Operator

Our final question comes from the line of Brian Meredith of UBS.

Brian Meredith, Analyst

On the proposed tax rate changes in the U.S., do you have any estimate on your operating tax rate if the rate was increased to 28%? And do you think changes in capital gains tax rates could impact demand for certain products across your platform?

Dan Houston, CEO

We are evaluating tax proposals. However, decisions are pending on those proposals and their implications. We are looking at the impact on our business in the U.S. and internationally based on varying proposals. As proposals evolve, we will align our lobbying efforts to support responsible tax policies that do not hinder our ability to assist customers with reaching financial security.

Deanna Strable, CFO

The devil is in the details; there are differential impacts that need close scrutiny. Changes could re-measure deferred tax liabilities and change our required capital. Statutory and balance sheet effects come into play, along with the effective tax rate.

Operator, Operator

And we have reached the end of our Q&A. Mr. Houston, your closing comments, please.

Dan Houston, CEO

Just real quickly, we feel good about the quarter. Recovery in the U.S. and Southeast Asia regarding COVID is evident. Unemployment is low, which leads to in some cases wage inflation. We see hiring among small, medium, and large employers, all macro events driving our businesses forward. We feel confident about the rest of the year. Key dates coming up include our shareholder's meeting on May 18th at 9 o'clock Central and our Investor Day on June 29th. We look forward to showcasing strategies for long-term growth and will execute on our strategy and deploy capital responsibly. Have a wonderful day and thank you for your time.

Operator, Operator

Thank you for participating in today's conference call. This call will be available for replay beginning at approximately 1:00 p.m. Eastern Time today until the end of the day, May 04, 2021.